<PAGE 1>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K405
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission file numbers 1-743; 1-3744; 1-4793; 1-5462
NORFOLK SOUTHERN RAILWAY COMPANY
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
- ------------------------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three Commercial Place, Norfolk, Virginia 23510-2191
- ------------------------------------------------ ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (757) 629-2680
----------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS SO REGISTERED. EACH CLASS REGISTERED ON NEW YORK
STOCK EXCHANGE:
Norfolk and Western Railway Company 4.85% Subordinated Income
Debentures, due November 15, 2015; Guarantee of Norfolk Southern Railway
Company with respect to $1,754,900 principal amount of Norfolk and
Western Railway Company 4.85% Subordinated Income Debentures due
November 15, 2015; The Virginian Railway Company 6% Subordinated Income
Debentures, due August 1, 2008; Guarantee of Norfolk Southern Railway
Company with respect to $4,466,000 principal amount of The Virginian
Railway Company 6% Subordinated Income Debentures due August 1, 2008;
Norfolk Southern Railway Company $2.60 Cumulative Preferred Stock,
Series A (No Par Value, $50 Stated Value).
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K405 or any amendment to this Form 10-K405. (X)
The aggregate market value of the voting stock held by
nonaffiliates as of January 31, 2000: $34,737,626.
The number of shares outstanding of each of the registrant's
classes of Common Stock, as of January 31, 2000: 16,668,997.
PAGE 2
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement (to be
dated April 14, 2000), to be filed electronically pursuant to
Regulation 14A not later than 120 days after the end of the fiscal
year, are incorporated by reference in Part III.
PAGE 3
TABLE OF CONTENTS
-----------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Page
----
Part I. 1. Business 4
2. Properties 4
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 16
Executive Officers of the Registrant 17
Part II. 5. Market for Registrant's Common Stock and
Related Stockholder Matters 23
6. Selected Financial Data 24
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
7A. Quantitative and Qualitative Disclosures
About Market Risk 39
8. Financial Statements and Supplementary Data 40
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 66
Part III.10. Directors and Executive Officers of the Registrant 67
11. Executive Compensation 67
12. Security Ownership of Certain Beneficial Owners
and Management 67
13. Certain Relationships and Related Transactions 67
Part IV. 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 68
Index to Consolidated Financial Statement Schedule 68
Power of Attorney 73
Signatures 73
Exhibit Index 77
PAGE 4
PART I
------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item 1. Business.
- ------ --------
and
Item 2. Properties.
- ------ ----------
GENERAL - Norfolk Southern Railway Company (Norfolk Southern
Railway) was incorporated in 1894 under the name Southern Railway
Company (Southern) in the Commonwealth of Virginia and, together with
its consolidated subsidiaries (collectively NS Rail), is primarily
engaged in the transportation of freight by rail.
On June 1, l982, Southern and Norfolk and Western Railway Company
(N&W) became subsidiaries of Norfolk Southern Corporation (NS), a
transportation holding company. Effective Dec. 31, 1990, NS
transferred all the common stock of N&W to Southern, and Southern's
name was changed to Norfolk Southern Railway Company. Effective
Sept. 1, 1998, N&W was merged with and into Norfolk Southern Railway.
All the common stock of Norfolk Southern Railway (16,668,997 shares)
is owned directly by NS. NS common stock is publicly held and listed
on the New York Stock Exchange.
There remain issued and outstanding as of Dec. 31, 1999,
1,197,027 shares of Norfolk Southern Railway's $2.60 Cumulative
Preferred Stock, Series A (Series A Stock), of which 1,096,907 shares
were held by other than subsidiaries. The Series A Stock is entitled
to one vote per share, is nonconvertible and is traded on the New York
Stock Exchange. As of Dec. 31, 1999, NS held a total of 176,705 shares
of Series A Stock; consequently, as of the same date, NS held
94.8 percent of the voting stock of Norfolk Southern Railway.
OPERATION OF A PORTION OF THE CONRAIL RAIL ASSETS - On June 1,
1999, Norfolk Southern Railway and CSX Corporation (CSX), through its
railroad subsidiary, began operating separate portions of Conrail's
rail routes and assets. Substantially all such assets are owned by
two wholly owned subsidiaries of Consolidated Rail Corporation (CRC);
one of those subsidiaries, Pennsylvania Lines LLC (PRR), has entered
into various operating and leasing arrangements, more particularly
described in Note 2 on Page 48, with Norfolk Southern Railway.
Certain rail assets (Shared Assets Areas) still are owned by CRC,
which operates them for joint and exclusive use by Norfolk Southern
Railway and the rail subsidiary of CSX.
PAGE 5
Operation of the PRR routes and assets increased the size of the
system over which Norfolk Southern Railway provides service by nearly
50% and afforded access to the New York metropolitan area, to much of
the Northeast and to most of the major East Coast ports north of
Norfolk, Va. Also, the leasing arrangements with PRR augmented
Norfolk Southern Railway's locomotive, freight car and intermodal
fleet.
OPERATIONS - As of Dec. 31, 1999, NS Rail operated approximately
21,800 miles of road in the states of Alabama, Delaware, Florida,
Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland,
Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina,
Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West
Virginia, and in the Province of Ontario, Canada. Of this total,
about 12,000 miles are owned with the balance operated under lease or
trackage rights; most of this total is main line track. In addition,
NS Rail operates almost 17,000 miles of passing, industrial, yard and
side tracks.
In addition to the lines leased from Conrail previously
discussed, NS Rail has major leased lines between Cincinnati, Ohio,
and Chattanooga, Tennessee, and operates over trackage owned by North
Carolina Railway Company (NCRR).
The Cincinnati-Chattanooga lease, covering about 335 miles,
expires in 2026, and is subject to an option to extend the lease for
an additional 25 years, at terms to be agreed upon.
Operations over the approximately 330 miles of tracks of NCRR,
previously under a 100-year lease which expired on Dec. 31, 1994, are
now under a trackage rights agreement. The term of the agreement is
15 years with NS Rail having the right to renew for two additional
15-year periods. The new arrangement resolved all outstanding
litigation between NS Rail and NCRR and settled a number of contested
real property issues. The agreement also includes very broad dispute
resolution provisions.
NS Rail's lines carry raw materials, intermediate products and
finished goods primarily in the Southeast, East and Midwest, and to
and from the rest of the United States and parts of Canada. These
lines also transport overseas freight through several Atlantic and
Gulf Coast ports. Atlantic ports served by NS Rail include: Norfolk,
Virginia; Morehead City, North Carolina; Charleston, South Carolina;
Savannah and Brunswick, Georgia; Jacksonville, Florida; Baltimore,
Maryland; Philadelphia, Pennsylvania/Camden, New Jersey; Wilmington,
Delaware; and the Ports of New York/New Jersey. Gulf Coast ports
served include Mobile, Alabama, and New Orleans, Louisiana.
NS Rail's lines reach most of the larger industrial and trading
centers of the Southeast, East and Midwest, with the exception of
those in central and southern Florida. Atlanta, Birmingham, New
Orleans, Memphis, St. Louis, Kansas City (Missouri), Chicago, Detroit,
Cincinnati, Buffalo, Norfolk, Charleston, Savannah, Jacksonville,
Cleveland, Newark, Pittsburgh, Philadelphia and Baltimore are among
the leading centers originating and terminating freight traffic on the
system. In addition, a haulage arrangement with Florida East Coast
Railway Company allows NS Rail to provide single-line service to and
PAGE 6
from south Florida, including the port cities of Miami, West Palm
Beach and Fort Lauderdale. The system's lines also reach many
individual industries, mines (in western Virginia, eastern Kentucky,
southern and northern West Virginia and western Pennsylvania) and
businesses located in smaller communities in its service area. The
traffic corridors carrying the heaviest volumes of freight include
those from the Appalachian coal fields of Virginia, West Virginia and
Kentucky, to Norfolk and Sandusky, Ohio; Buffalo to Chicago and Kansas
City; Chicago to Jacksonville (via Cincinnati, Chattanooga and
Atlanta); and Washington, D.C./Hagerstown, Maryland, to New Orleans
(via Atlanta and Birmingham); and the New Jersey area to Chicago (via
Allentown and Pittsburgh).
Buffalo, Chicago, Hagerstown, Jacksonville, Kansas City, Memphis,
New Orleans and St. Louis are major gateways for interterritorial
system traffic.
RAILWAY OPERATING REVENUES - NS Rail's total railway operating
revenues were $5.1 billion in 1999. Revenue, shipments and revenue
yield by principal railway operating revenue sources for the past five
years are set forth in the following table:
Year Ended December 31,
Principal Sources of ------------------------------------------------
Railway Operating
Revenues 1999 1998 1997 1996 1995
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
COAL
Revenues $1,315 $1,252 $1,301 $1,305 $1,268
% of total revenues 26% 30% 31% 32% 32%
Shipments 1,519 1,310 1,324 1,310 1,267
% of total
shipments 25% 27% 28% 29% 29%
Revenue Yield $ 866 $ 956 $ 983 $ 996 $1,001
AUTOMOTIVE
Revenues $ 740 $ 566 $ 492 $ 489 $ 449
% of total revenues 14% 13% 11% 12% 11%
Shipments 612 487 361 354 328
% of total
shipments 10% 10% 8% 8% 7%
Revenue Yield $1,209 $1,162 $1,364 $1,379 $1,368
CHEMICALS
Revenues $ 720 $ 574 $ 585 $ 560 $ 541
% of total revenues 14% 13% 14% 14% 14%
Shipments 475 401 405 385 374
% of total
shipments 8% 8% 8% 8% 8%
Revenue Yield $1,516 $1,431 $1,446 $1,456 $1,447
PAPER/CLAY/FOREST
Revenues $ 575 $ 534 $ 539 $ 513 $ 537
% of total revenues 11% 13% 13% 12% 13%
Shipments 465 445 457 438 459
% of total
shipments 8% 9% 9% 10% 10%
Revenue Yield $1,237 $1,200 $1,178 $1,171 $1,170
PAGE 7
Year Ended December 31,
Principal Sources of ------------------------------------------------
Railway Operating
Revenues 1999 1998 1997 1996 1995
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
METALS/CONSTRUCTION
Revenues $ 562 $ 373 $ 368 $ 354 $ 349
% of total revenues 11% 9% 9% 9% 8%
Shipments 587 372 374 359 367
% of total
shipments 10% 8% 8% 8% 8%
Revenue Yield $ 957 $1,003 $ 985 $ 986 $ 951
AGR./CONSUMER PRODUCTS/
GOVT.
Revenues $ 453 $ 383 $ 391 $ 393 $ 394
% of total revenues 9% 9% 9% 9% 10%
Shipments 407 355 366 376 391
% of total
shipments 7% 8% 8% 8% 9%
Revenue Yield $1,113 $1,079 $1,065 $1,045 $1,007
INTERMODAL
(Trailers, Containers
and RoadRailers)
Revenues $ 749 $ 539 $ 547 $ 487 $ 474
% of total revenues 15% 13% 13% 12% 12%
Shipments 1,896 1,443 1,472 1,331 1,263
% of total
shipments 32% 30% 31% 29% 29%
Revenue Yield $ 395 $ 374 $ 372 $ 366 $ 376
Total Railway
Operating Revenues $5,114 $4,221 $4,223 $4,101 $4,012
Total Railway
Shipments 5,961 4,813 4,759 4,553 4,449
Railway Revenue
Yield $ 858 $ 877 $ 887 $ 901 $ 902
Note: Other railway revenues (principally switching and demurrage)
have been allocated to revenues reported for each commodity group.
Shipments include general merchandise and coal rail carloads and
intermodal rail and RoadRailer(RT) units.
PAGE 8
COAL TRAFFIC - Coal, coke and iron ore -- most of which is
bituminous coal -- is NS Rail's largest commodity group as measured by
revenues. NS Rail originated 138 million tons of coal, coke and iron
ore in 1999 and handled a total of 158 million tons. Originated
tonnage and total tons handled increased due to the commencement of
operations in the Northern Region. Revenues from coal, coke and iron
ore account for about 26 percent of NS Rail's total railway operating
revenues.
The following table shows total coal, coke and iron ore tonnage
originated on line, received from connections and handled for the past
five years:
Tons of Coal, Coke and Iron Ore (Millions)
------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Originated 138 119 119 117 114
Received 20 15 15 13 11
--- --- --- --- ---
Handled 158 134 134 130 125
=== === === === ===
Of the 138 million tons of coal, coke and iron ore originated on
NS Rail's lines in 1999, the approximate breakdown by origin state was
as follows:
Origin State Millions of Tons
------------ ----------------
West Virginia 45
Virginia 31
Kentucky 24
Pennsylvania 15
Indiana 7
Ohio 6
Alabama 4
Illinois 3
Tennessee 1
Other 2
---
138
===
Of the 158 million tons handled, approximately 18 million moved
for export, principally through NS Rail's pier facilities at Norfolk
(Lamberts Point), Virginia; 22 million moved to domestic and Canadian
steel industries; 108 million of steam coal moved to electric
utilities; and 10 million moved to other industrial and miscellaneous
users.
NS Rail moved 9 million tons of originated coal, coke and iron
ore to various docks on the Ohio River, and 7 million tons to various
Lake Erie ports. Other than coal for export, virtually all coal
handled by NS Rail was terminated in states situated east of the
Mississippi River.
PAGE 9
Total coal handled through all system ports in 1999 was
38 million tons. Of this total, 53 percent, or 20 million tons
(including coastwise traffic), moved through Lamberts Point, a
26 percent decrease compared with the 27 million tons handled in 1998.
The quantities of NS Rail export coal handled through Lamberts
Point for the past five years were as follows:
Export Coal through Lamberts Point
(Millions of tons)
----------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
17 24 28 26 25
See the discussion of coal traffic, by type of coal, in Part II,
Item 7, "Management's Discussion and Analysis."
MERCHANDISE TRAFFIC - The merchandise traffic group consists of
intermodal and general merchandise, which consists of five major
commodity groupings: automotive; chemicals; paper, clay and forest
products; metals and construction; and agriculture, consumer products
and government. Total merchandise revenues in 1999 were $3.9 billion,
a 31 percent increase, compared with 1998. Merchandise carloads and
intermodal units handled in 1999 were 4.44 million, compared with
3.50 million handled in 1998, an increase of 27 percent. The
increases in revenues and carloads reflect the commencement of
operations in the Northern Region.
In 1999, 136 million tons of merchandise freight, or
approximately 67 percent of total merchandise tonnage handled by
NS Rail, originated online. The balance of merchandise traffic was
received from connecting carriers, usually at interterritorial
gateways. The principal interchange points for NS Rail-received
traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas
City, Detroit, Hagerstown, St. Louis/East St. Louis and Louisville.
Revenues in all six market groups comprising merchandise traffic
increased in 1999, due to the commencement of operations in the
Northern Region.
See the discussion of general merchandise rail traffic by
commodity group and intermodal rail traffic in Part II, Item 7,
"Management's Discussion and Analysis."
PAGE 10
OPERATING STATISTICS - The following table sets forth certain
statistics relating to NS Rail's operations for the past five years,
including operations in the Northern Region that commenced June 1,
1999:
Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenue ton miles (billions) 165 133 136 130 127
Freight train miles
traveled (millions) 61.5 53.0 49.7 49.4 48.5
Revenue per ton mile $0.0314 $0.0316 $0.0311 $0.0316 $0.0317
Revenue tons per train 2,691 2,517 2,732 2,625 2,611
Revenue ton miles
per man-hour worked 2,560 2,635 2,905 2,764 2,679
Percentage ratio of
railway operating
expenses to railway
operating revenues 86.2% 75.1% 71.3% 71.6% 73.5%
FREIGHT RATES - In 1999, NS Rail continued its reliance on
private contracts and exempt price quotes as the predominant pricing
mechanism. Thus, a major portion of NS Rail's freight business is not
currently economically regulated by the government. In general,
market forces have been substituted for government regulation and now
are the primary determinant of rail service prices.
In 1999, NS Rail was found by the STB not to be "revenue
adequate" based on results for the year 1998. A railroad is "revenue
adequate" under the applicable law when its return on net investment
exceeds the rail industry's composite cost of capital.
PASSENGER OPERATIONS - Regularly scheduled passenger operations
on NS Rail's lines consist of Amtrak trains operating between
Alexandria and New Orleans, and between Charlotte and Selma, North
Carolina. Commuter trains are operated on the NS Rail line between
Manassas and Alexandria under contract with two transportation
commissions of the Commonwealth of Virginia. NS Rail also leases the
Chicago to Manhattan, Illinois, line to the Commuter Rail Division of
the Regional Transportation Authority of Northeast Illinois. Since
June 1, 1999, Norfolk Southern Railway Company has operated former
Conrail lines on which Amtrak conducts regularly scheduled passenger
operations between Chicago, Illinois, and Detroit, Michigan, and
between Chicago and Harrisburg, Pennsylvania. All of these services
are under contracts providing for reimbursement of related expenses
incurred by NS Rail.
Also since June 1, 1999, Norfolk Southern Railway has been
providing freight service over former Conrail lines with significant
ongoing Amtrak and commuter passenger operations, and is conducting
freight operations over some trackage owned by Amtrak or by New Jersey
Transit, the Southeastern Pennsylvania Transportation Authority, Metro-
North Commuter Railway Company and Maryland DOT. Finally, passenger
operations are conducted either by Amtrak or by the commuter agencies
over trackage owned by Pennsylvania Lines LLC, or by Conrail in the
Shared Assets Areas.
PAGE 11
In addition, through its operation of PRR's routes, Norfolk
Southern Railway provides freight service over lines with significant
ongoing Amtrak and commuter passenger operations, and conducts freight
operations over some trackage owned by Amtrak or by commuter entities.
RAILWAY PROPERTY:
EQUIPMENT - As of December 31, 1999, NS Rail owned or leased the
following units of equipment:
Number of Units
---------------------------- Capacity
Owned* Leased** Total of Equipment
----- ------ ----- ------------
Type of Equipment
- -----------------
Locomotives: (Horsepower)
Multiple purpose 2,232 949 3,181 10,315,300
Switching 110 113 223 325,800
Auxiliary units 59 18 77 --
------ ------ ------- ----------
Total locomotives 2,401 1,080 3,481 10,641,100
====== ====== ======= ==========
Freight Cars: (Tons)
Hopper 20,605 5,796 26,401 2,773,704
Box 18,993 5,657 24,650 1,914,567
Covered Hopper 12,073 3,737 15,810 1,711,311
Gondola 28,591 12,534 41,125 4,380,293
Flat 4,181 1,035 5,216 392,663
Caboose 190 78 268 --
Other 793 -- 793 63,656
------ ------ ------- ----------
Total freight cars 85,426 28,837 114,263 11,236,194
====== ====== ======= ==========
Other:
Work equipment 6,005 2,151 8,156
Vehicles 3,685 1,720 5,405
Highway trailers
and containers 1,871 5,319 7,190
Miscellaneous 1,497 6,404 7,901
------ ------ -------
Total other 13,058 15,594 28,652
====== ====== =======
* Includes equipment leased to outside parties and equipment
subject to equipment trusts, conditional sale agreements and
capitalized leases.
** Includes 1,020 locomotives, 20,351 freight cars and 3,880
units of other equipment leased from PRR.
PAGE 12
In addition, NS Rail has leased locomotives to meet immediate
needs. As of Dec. 31, 1999, NS Rail had 555 units under several short-
term leases, most of which expire in the first quarter of 2000.
The following table indicates the number and year built for
locomotives and freight cars owned at Dec. 31, 1999:
Year Built
-----------------------------------------------------------
1989- 1983- 1982 &
1999 1998 1997 1996 1995 1994 1988 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
Locomotives:
Number of
units 147 119 120 119 125 289 327 1,155 2,401
Percent of
fleet 6 5 5 5 6 12 13 48 100%
Freight cars:
Number of
units 438 1,167 531 787 1,036 6,610 1,335 73,522 85,426
Percent of
fleet 1 1 1 1 1 8 1 86 100%
The average age of the freight car fleet at Dec. 31, 1999, was
24.4 years. During 1999, 423 freight cars were retired. As of
Dec. 31, 1999, the average age of the locomotive fleet was 15.4 years.
During 1999, 13 locomotives, the average age of which was 22.7 years,
were retired. Since 1988, about 29,000 coal cars have been rebodied.
As a result, the remaining serviceability of the freight car fleet is
greater than may be inferred from the high percentage of freight cars
built in earlier years.
Ongoing freight car and locomotive maintenance programs are
intended to ensure the highest standards of safety, reliability,
customer satisfaction and equipment marketability. In past years, the
freight car bad order ratio reflected the storage of certain types of
cars which were not in high demand. The ratio has declined more
recently as a result of a disposition program for underutilized,
unserviceable and overage revenue cars. In this connection, an
orderly disposition of 17,000 freight cars, begun in October 1994, was
completed in 1997. The locomotive bad order ratio rose in 1997,
particularly in the early months of the year, as older units required
additional servicing and some new units were out-of-service related to
warranty work. By year-end 1997, the locomotive bad order ratio had
returned to a level nearer that of prior years. The increase in the
locomotive bad order ratio in 1999 was primarily due to the
maintenance requirements of units being rented to meet short-term
needs and to weather-related failures.
PAGE 13
Annual Average Bad Order Ratio
--------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Freight Cars (excluding cabooses):
NS Rail 3.3% 4.1% 4.6% 4.8% 5.8%
Locomotives:
NS Rail 5.3% 4.3% 5.0% 4.5% 4.7%
TRACKAGE - All NS Rail trackage is standard gauge, and the rail
in approximately 96 percent of the main line trackage (including
first, second, third and branch main tracks, all excluding trackage
rights) ranges from 100 to 140 pounds per yard. Of the approximately
31,900 miles of track maintained as of Dec. 31, 1999, about 21,800
were laid with welded rail.
The density of traffic on running tracks (main line trackage plus
passing tracks) during 1999 was as follows:
Gross tons of
freight carried
per track mile Track miles of Percent
(Millions) running tracks* of total
--------------- -------------- --------
0-4 9,070 39
5-19 6,561 29
20 and over 7,372 32
------ ---
23,003 100
====== ===
* Excludes trackage rights and includes track in the Northern
Region, where operations commenced June 1, 1999.
The following table summarizes certain information about track
roadway additions and replacements during the past five years:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Track miles of rail installed 403 429 451 401 403
Miles of track surfaced 5,087 4,715 4,703 4,686 4,668
New crossties installed
(millions) 2.3 2.0 2.2 1.9 2.0
MICROWAVE SYSTEM - The NS Rail microwave system, consisting of
8,140 radio path miles, 430 active stations and 4 passive repeater
stations, provides communications between most operating locations.
The microwave system is used primarily for voice communications, VHF
radio control circuits, data and facsimile transmissions, traffic
control operations, AEI data transmissions and relay of intelligence
from defective equipment detectors.
PAGE 14
TRAFFIC CONTROL - Of a total of 21,800 road miles operated by
NS Rail, excluding trackage rights over foreign lines, 8,370 road
miles are governed by centralized traffic control systems (of which
1,000 miles are controlled by data radio from 78 microwave site
locations and 460 miles are cab-signal only) and 3,070 road miles are
equipped for automatic block system operation.
COMPUTERS - Data processing facilities connect the yards,
terminals, transportation offices, rolling stock repair points, sales
offices and other key system locations to the central computer complex
in Atlanta, Georgia. Operating and traffic data are compiled and
stored to provide customers with information on their shipments
throughout the system. Data processing facilities are capable of
providing current information on the location of every train and each
car on line, as well as related waybill and other train and car
movement data. Additionally, these facilities afford substantial
capacity for, and are utilized to assist management in the performance
of, a wide variety of functions and services, including payroll, car
and revenue accounting, billing, material management activities and
controls, and special studies.
OTHER - The railroads have extensive facilities for support of
operations, including freight depots, car construction shops,
maintenance shops, office buildings, and signals and communications
facilities.
ENCUMBRANCES - Certain railroad equipment is subject to the prior
lien of equipment financing obligations amounting to approximately
$930 million as of Dec. 31, 1999, and $728 million at Dec. 31, 1998.
CAPITAL EXPENDITURES - Capital expenditures for road, equipment
and other property for the past five years were as follows (including
capitalized leases):
Capital Expenditures
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In millions of dollars)
Road $ 559 $ 583 $ 580 $ 428 $ 379
Equipment 356 419 304 326 333
Other property -- -- -- -- 1
------ ------ ------ ------ ------
Total $ 915 $1,002 $ 884 $ 754 $ 713
====== ====== ====== ====== ======
Capital spending and maintenance programs are and have been
designed to assure the ability to provide safe, efficient and reliable
transportation services. For 2000, NS Rail has budgeted approximately
$747 million of capital spending. In addition, NS Rail plans to enter
into a lease financing arrangement for 150 new locomotives, and
NS Rail expects to lease 475 articulated bilevels for automotive
service.
PAGE 15
ENVIRONMENTAL MATTERS - Compliance with federal, state and local
laws and regulations relating to the protection of the environment is
a principal NS Rail goal. To date, such compliance has not affected
materially NS Rail's capital additions, earnings, liquidity or
competitive position. See the discussion of "Environmental Matters"
on Page 37 in Part II, Item 7, "Management's Discussion and Analysis,"
and in Note 15 to the Consolidated Financial Statements on Page 62.
EMPLOYEES - NS Rail employed an average of 30,897 employees in
1999, compared with an average of 24,185 in 1998 (including Norfolk
Southern Corporation's employees whose primary duties relate to rail
operations). The increase reflects the substantial number of Conrail
employees that became NS Rail employees on June 1, 1999. The
approximate average cost per employee during 1999 was $48,600 in wages
and $17,400 in employee benefits.
Approximately 85 percent of NS Rail's employees are represented
by labor unions under collective bargaining agreements with 14
different labor organizations. See the discussion of "Labor
Agreements" on Page 38 in Part II, Item 7, "Management's Discussion
and Analysis."
GOVERNMENT REGULATION - In addition to environmental, safety,
securities and other regulations generally applicable to all
businesses, NS Rail is subject to regulation by the STB, which
succeeded the ICC on Jan. 1, 1996. The STB has jurisdiction over some
rates, routes, conditions of service and the extension or abandonment
of rail lines. The STB also has jurisdiction over the consolidation,
merger or acquisition of control of and by rail common carriers. The
Department of Transportation regulates certain track and mechanical
equipment standards.
The relaxation of economic regulation of railroads, begun over a
decade ago by the ICC under the Staggers Rail Act of 1980, has
continued under the STB, and additional rail business could be
exempted from regulation in the future. Significant exemptions are
TOFC/COFC (i.e., "piggyback") business, rail boxcar traffic, lumber,
manufactured steel, automobiles and certain bulk commodities such as
sand, gravel, pulpwood and wood chips for paper manufacturing.
Transportation contracts on regulated shipments effectively remove
those shipments from regulation as well. About 80 percent of
NS Rail's freight revenues come from either exempt traffic or traffic
moving under transportation contracts.
Efforts may be made in 2000 to re-subject the rail industry to
unwarranted federal economic regulation. The Staggers Rail Act of
1980, which substantially reduced such regulation, encouraged and
enabled rail carriers to innovate and to compete for business, thereby
contributing to the economic health of the nation and to the
revitalization of the industry. Accordingly, NS Rail and other rail
carriers vigorously will oppose these counterproductive efforts to
reimpose or to authorize reimposing such economic regulation.
COMPETITION - There is continuing strong competition among rail,
water and highway carriers. Price is usually only one factor of
importance as shippers and receivers choose a transport mode and
specific hauling company. Inventory carrying costs, service
PAGE 16
reliability, ease of handling and the desire to avoid loss and damage
during transit are increasingly important considerations, especially
for higher-valued finished goods, machinery and consumer products.
Even for raw materials, semi-finished goods and work-in-process, users
are increasingly sensitive to transport arrangements which minimize
problems at successive production stages.
NS Rail's primary rail competitor is the CSX system; both operate
throughout much of the same territory. Other railroads also operate
in parts of the territory. NS Rail also competes with motor carriers,
water carriers and with shippers who have the additional option of
handling their own goods in private carriage.
Certain cooperative strategies between railroads and between
railroads and motor carriers enable carriers to compete more
effectively in specific markets.
Item 3. Legal Proceedings.
- ------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security
holders during the fourth quarter of 1999.
PAGE 17
Executive Officers of the Registrant.
- ------------------------------------
Norfolk Southern Railway's officers are elected annually by the
Board of Directors at its first meeting held after the annual meeting of
stockholders, and they hold office until their successors are elected.
There are no family relationships among the officers, nor any arrangement
or understanding between any officer and any other person pursuant to
which the officer was selected. The following table sets forth certain
information, as of February 1, 2000, relating to these officers:
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
David R. Goode, 59, Present position since September
President and 1992. Also, Chairman, President,
Chief Executive Officer and Chief Executive Officer of
Norfolk Southern Corporation since
September 1992.
L. I. Prillaman, 56, Present position since August 1998.
Vice President and Also, Vice Chairman and Chief
Chief Marketing Officer Marketing Officer of Norfolk
Southern Corporation since August
1998. Served as Vice President and
Chief Traffic Officer of Norfolk
Southern Railway and Executive Vice
President-Marketing of Norfolk
Southern Corporation from October
1995 to August 1998, and prior
thereto was Vice President-
Properties.
Stephen C. Tobias, 55, Present position since August 1998.
Vice President and Also, Vice Chairman and Chief
Chief Operating Officer Operating Officer of Norfolk
Southern Corporation since August
1998, and prior thereto was Vice
President of Norfolk Southern
Railway and Executive Vice
President-Operations of Norfolk
Southern Corporation.
Henry C. Wolf, 57, Present position since August 1998.
Vice President and Also, Vice Chairman and Chief
Chief Financial Officer Financial Officer of Norfolk
Southern Corporation since August
1998, and prior thereto was Vice
President-Finance of Norfolk
Southern Railway and Executive Vice
President-Finance of Norfolk
Southern Corporation.
PAGE 18
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Paul N. Austin, 56, Present position since September
Vice President-Human Resources 1998. Also, Vice President and
Assistant to Chairman, President
and Chief Executive Officer of
Norfolk Southern Corporation since
November 1, 1999. Served as Vice
President-Human Resources and
Assistant to Chairman of Norfolk
Southern Corporation from September
1998 to November 1999, and prior
thereto was Vice President-
Personnel and Assistant to
Chairman.
James C. Bishop, Jr., 63, Present position since March 1996.
Vice President-Law Also, Executive Vice President-Law
of Norfolk Southern Corporation
since March 1996, and prior thereto
was Vice President-Law.
R. Alan Brogan, 59, Present position since April 1998.
Vice President-Corporate Also, Executive President Norfolk
Southern Intermodal since
December 1, 1999, and prior thereto
was Vice President-Transportation
Logistics of Norfolk Southern
Railway and Executive Vice
President-Corporate of Norfolk
Southern Corporation.
David A. Cox, 64, Present position since December
Vice President-Properties 1995. Also, Senior Vice President-
Properties and Development of
Norfolk Southern Corporation since
October 1, 1999, and prior thereto
was Vice President-Properties.
Timothy P. Dwyer, 50, Present position since August 1998.
Vice President-Marketing Services Also, Vice President-Marketing
Services of Norfolk Southern
Corporation since August 1998.
Served as Senior Vice President-
Operations of Conrail from June
1998 to August 1998, and prior
thereto was Senior Vice President-
Unit Train Service Group of
Conrail.
Nancy S. Fleischman, 52, Present position since August 1997.
Vice President Also, Vice President of Norfolk
Southern Corporation since August
1997, and prior thereto was
Assistant Vice President-Strategic
Planning.
PAGE 19
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Robert C. Fort, 55, Present position since December 1996.
Vice President-Public Relations Also, Vice President-Public
Relations of Norfolk Southern
Corporation since December 1996,
and prior thereto was Assistant
Vice President-Public Relations.
John W. Fox, Jr., 52, Present position since October 1995.
Vice President-Coal Marketing Also, Senior Vice President-Coal
Marketing of Norfolk Southern
Corporation since December 1, 1999,
and prior thereto was Vice
President-Coal Marketing.
William A. Galanko, 43 Present position since January 15,
Vice President 2000. Also Vice President-Taxation
of Norfolk Southern Corporation
since November 1, 1999, and prior
thereto was Tax Counsel.
Lewis D. Hale, Jr., 53, Present position since August 1998.
Vice President-Transportation Also, Vice President-Transportation
of Norfolk Southern Corporation
since August 1998. Served as
Assistant Vice President-Mechanical
from December 1995 to August 1998,
and prior thereto was General
Manager Western Region.
James A. Hixon, 46, Present position since June 1993.
Vice President-Taxation Also, Senior Vice President-
Employee Relations of Norfolk
Southern Corporation since
November 1, 1999, and prior thereto
was Vice President-Taxation.
Thomas C. Hostutler, 63, Present position since August 1998.
Vice President-Internal Audit Also, Vice President-Internal Audit
of Norfolk Southern Corporation
since August 1998, and prior
thereto was Senior Assistant Vice
President-Corporate Accounting.
H. Craig Lewis, 55, Present position since August 1998.
Vice President-Corporate Affairs Also, Vice President-Corporate
Affairs of Norfolk Southern
Corporation since August 1998.
Served as Regional Vice President
from August 1997 to August 1998,
and prior thereto was a partner in
a Pennsylvania law firm.
PAGE 20
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Jon L. Manetta, 61, Present position since June 2, 1999.
Vice President-Operations Also, Senior Vice President-
Operations of Norfolk Southern
Corporation since August 1998.
Served as Senior Vice President-
Operations from August 1998 to
June 2, 1999, of Norfolk Southern
Railway and Vice President-
Transportation & Mechanical of
Norfolk Southern Corporation from
December 1995 to August 1998, and
prior thereto was Vice President-
Transportation.
Mark D. Manion, 47, Present position since August 1998.
Vice President-Mechanical Also, Vice President-Mechanical of
Norfolk Southern Corporation since
August 1998. Served as General
Manager Western Region from
December 1995 to August 1998, and
prior thereto was Assistant Vice
President-Transportation.
Harold C. Mauney, Jr., 61, Present position since August 1997.
Vice President-Public Affairs Also, Vice President-Public Affairs
of Norfolk Southern Corporation
since August 1997. Served as Vice
President-Operations Planning and
Budget of Norfolk Southern Railway
and Norfolk Southern Corporation
from December 1996 to August 1997,
and prior thereto was Vice
President-Quality Management.
Donald W. Mayberry, 56, Present position since December 1995.
Vice President-Research and Tests Also, Vice President-Research and
Tests of Norfolk Southern
Corporation since December 1995,
and prior thereto was Vice
President-Mechanical.
James W. McClellan, 60, Present position since June 2, 1999.
Vice President-Planning Also, Senior Vice President-
Planning of Norfolk Southern
Corporation since August 1, 1998.
Served as Senior Vice President-
Planning of Norfolk Southern
Railway from August 1998 to June 2,
1999, and prior thereto was Vice
President-Strategic Planning.
PAGE 21
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Kathryn B. McQuade, 43, Present position since August 1998.
Vice President-Financial Planning Also, Vice President-Financial
Planning of Norfolk Southern
Corporation since August 1998, and
prior thereto was Vice President-
Internal Audit.
Charles W. Moorman, 48, Present position since October 1993.
Vice President-Information Also, President Thoroughbred
Technology Technology and Communications, Inc.
of Norfolk Southern Corporation
since October 1, 1999, and prior
thereto was Vice President-
Information Technology.
Phillip R. Ogden, 59, Present position since June 2, 1999.
Vice President-Engineering Also, Senior Vice President-
Engineering of Norfolk Southern
Corporation since August 1, 1998.
Served as Senior Vice President-
Engineering of Norfolk Southern
Railway from August 1998 to June 2,
1999, and prior thereto was Vice
President-Engineering.
John P. Rathbone, 48, Present position since December 1992.
Vice President and Controller Also, Vice President and Controller
of Norfolk Southern Corporation
since December 1992.
Stephen P. Renken, 56, Present position since January 15,
Vice President 2000. Also Vice President-
Information Technology of Norfolk
Southern Corporation since
October 1, 1999. Served as
Assistant Vice President-Program
Management from January 1998 to
October 1, 1999, and prior thereto
was employed by Burlington Northern
Santa Fe.
William J. Romig, 55, Present position since December 1992.
Vice President Also, Vice President and Treasurer
of Norfolk Southern Corporation
since December 1992.
PAGE 22
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
John M. Samuels, 56, Present position since January 1998.
Vice President-Operations Also, Vice President-Operations
Planning and Budget Planning and Budget of Norfolk
Southern Corporation since January
1998. Previously served as Vice
President-Operating Assets of
Conrail from January 1996 to
January 1998, and prior thereto was
Vice President-Mechanical of
Conrail.
Donald W. Seale, 47, Present position since August 1993.
Vice President- Also, Senior Vice President-
Merchandise Marketing Merchandise Marketing of Norfolk
Southern Corporation since
December 1, 1999, and prior thereto
was Vice President-Merchandise
Marketing.
Rashe W. Stephens, Jr., 58, Present position since December
Vice President-Quality Management 1996. Also, Vice President-Quality
Management of Norfolk Southern
Corporation since December 1996,
and prior thereto was Assistant
Vice President-Public Affairs.
Charles J. Wehrmeister, 50, Present position since August 1998.
Vice President- Also, Vice President-Safety and
Safety and Environmental Environmental of Norfolk Southern
Corporation since August 1998.
Served as Assistant Vice President-
Safety and Environmental from
January 1995 to August 1998, and
prior thereto was Division
Superintendent, Virginia Division.
William C. Wooldridge, 57, Present position since February 1997.
Vice President Also, Vice President-Law of Norfolk
Southern Corporation since March
1996, and prior thereto was General
Counsel-Corporate.
Sandra T. Pierce, 45, Present position since June 1995.
Corporate Secretary Also, Assistant Corporate Secretary
of Norfolk Southern Corporation
since June 1995, and prior thereto
was Assistant Corporate Secretary-
Planning.
Ronald E. Sink, 57, Present position since September 1987.
Treasurer
PAGE 23
PART II
-------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item 5. Market for the Registrant's Common Stock and Related
- ------ ----------------------------------------------------
Stockholder Matters.
-------------------
COMMON STOCK
Since June 1, 1982, NS has owned all the common stock of Norfolk
Southern Railway Company. The common stock is not publicly traded.
PREFERRED STOCK INFORMATION
There are 10,000,000 shares of no par value serial preferred
stock authorized. This stock may be issued in series from time to
time at the discretion of the Board of Directors with any series
having such voting and other powers, designations, dividends and other
preferences as deemed appropriate at the time of issuance.
The $2.60 Cumulative Preferred Stock, Series A (Series A Stock),
of which 1,197,027 shares were issued and 1,096,907 shares were held
other than by subsidiaries, including 176,705 shares held by NS, as of
Dec. 31, 1999, has no par value but has a $50 per share stated value.
As indicated in the title, the stock pays a dividend of $2.60 per
share annually, payable quarterly on March 15, June 15, Sept. 15 and
Dec. 15. Dividends on this stock are cumulative and in preference to
dividends on all other classes of stock. Except for any shares held
by Norfolk Southern Railway Company subsidiaries and/or in a fiduciary
capacity, each share is entitled to one vote per share on all matters,
voting as a single class with holders of other stock. Should
dividends become delinquent for six quarters, this class of stock,
voting as a class, may elect two directors so long as any default in
dividend payments continues. The stock is redeemable at the option of
Norfolk Southern Railway Company at $50 per share plus accrued
dividends. On liquidation, the stock is entitled to $50 per share
plus accrued dividends before any amounts are paid on any other class
of stock.
PAGE 24
Item 6. Selected Financial Data.
- ------ -----------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Five-Year Financial Review
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
($ in millions)
RESULTS OF OPERATIONS:
Railway operating
revenues $ 5,114 $ 4,221 $ 4,223 $ 4,101 $ 4,012
Railway operating
expenses 4,611 3,178 3,010 2,936 2,949
------- ------- ------- ------- -------
Income from
railway operations 503 1,043 1,213 1,165 1,063
Other income (expense)
- net 42 90 (49) 39 44
Interest expense on
debt (39) (25) (30) (34) (33)
------- ------- ------- ------- -------
Income before
income taxes 506 1,108 1,134 1,170 1,074
Provision for income
taxes 174 383 380 401 372
------- ------- ------- ------- -------
Net income $ 332 $ 725 $ 754 $ 769 $ 702
======= ======= ======= ======= =======
FINANCIAL POSITION:
Total assets $12,632 $12,017 $11,827 $11,053 $10,752
Total long-term debt,
including current
maturities $ 866 $ 760 $ 606 $ 598 $ 574
Stockholders' equity $ 5,385 $ 6,137 $ 6,392 $ 5,772 $ 5,645
OTHER:
Capital expenditures $ 915 $ 1,002 $ 884 $ 754 $ 713
Number of stockholders
at year-end 2,109 2,317 2,519 2,763 3,025
Average number
of employees (1) 30,897 24,185 23,323 23,361 24,488
(1) The employee count includes NS' employees whose primary duties relate
to rail operations.
PAGE 25
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes beginning on Page 41 and
the Five-Year Financial Review on Page 24.
COMMENCEMENT OF OPERATIONS OVER CONRAIL'S LINES
On June 1, 1999 (the "Closing Date"), NS Rail began operating a
substantial portion of Conrail's properties (NS Rail's new "Northern
Region") under various agreements with Pennsylvania Lines LLC (PRR), a
wholly owned subsidiary of Consolidated Rail Corporation (CRC) (see
Note 2 on Page 48). As a result, both the railroad route miles operated
by NS Rail and the number of its employees increased by approximately 50%
on that date. Results for 1999 reflect five months (January through May)
of operating the former NS Rail system and seven months (June through
December) of operations that include the Northern Region.
Difficulties encountered in the assimilation of the Northern Region
into NS Rail's existing system resulted in system congestion, an increase
in cars on line, increased terminal dwell time and reduced system
velocity. These service issues and actions taken to address them
increased operating expenses, primarily labor costs and equipment costs,
including car hire and locomotive rentals. Moreover, revenues were lower
than expected as some customers diverted traffic to other modes of
transportation. Income from railway operations is expected to continue to
be adversely affected until these revenue and expense issues have been
resolved. A prolonged continuation of these operational difficulties
could have a substantial adverse impact on NS Rail's financial position,
results of operations and liquidity.
SUMMARIZED RESULTS OF OPERATIONS
1999 Compared with 1998
- -----------------------
Net income in 1999 was $332 million, a decrease of 54%. The decline
was largely the result of a 52% decrease in income from railway
operations, which reflected the difficulties in integrating the Northern
Region and a sharp decline in export coal traffic. In addition, railway
operating expenses included $168 million ($103 million after taxes) of
costs incurred on the Closing Date for contractual obligations,
principally to former Conrail employees, and expenses arising from the
license of intangible assets owned by NS (see Note 2 on Page 48). Lower
nonoperating income (see Note 3 on Page 52) and higher interest expense
on debt (a result of increased debt and lower capitalized interest) also
contributed to the decline in net income.
1998 Compared with 1997
- -----------------------
Net income in 1998 was $725 million, a decrease of 4%, compared with
1997. The decline was principally due to a 14% decline in income from
railway operations, somewhat offset by higher nonoperating income (see
Note 3 on Page 52).
RAILWAY OPERATING REVENUES AND EXPENSES
(Shown as a graph in the Annual Report to Stockholders)
($ in millions) 1999 1998 1997 1996 1995
--------------- ---- ---- ---- ---- ----
Revenues $5,114 $4,221 $4,223 $4,101 $4,012
Expenses 4,611 3,178 3,010 2,936 2,949
PAGE 26
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
- --------------------------
Railway operating revenues were $5.1 billion in 1999, compared with
$4.2 billion in both 1998 and 1997. Revenues in 1999 reflect the
commencement of operations in the Northern Region on June 1. Revenues
were lower than expected because of service issues associated with the
expansion of the network and a sharp decline in export coal traffic. The
following table presents a three-year comparison of revenues by market
group.
RAILWAY OPERATING REVENUES BY MARKET GROUP
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Coal $ 1,315 $ 1,252 $ 1,301
General merchandise:
Automotive 740 566 492
Chemicals 720 574 585
Paper/clay/forest 575 534 539
Metals/construction 562 373 368
Agriculture/consumer
products/government 453 383 391
------- ------- -------
General merchandise 3,050 2,430 2,375
Intermodal 749 539 547
------- ------- -------
Total $ 5,114 $ 4,221 $ 4,223
======= ======= =======
In 1999, revenues increased for all market groups as a result of
traffic handled in the Northern Region. Prior to the Closing Date,
revenues for all commodity groups, except automotive, were below or even
with those of the prior year. As shown in the following table, the full-
year volume gains attributable to expanded operations produced the
revenue increase. Revenue per unit improved for most market groups
principally due to the effects of the Northern Region traffic; however,
the effects of changes in the mix of traffic, most notably the reduced
export coal traffic, more than offset the effects of the revenue-per-unit
improvements.
In 1998, revenue increases in the automotive and metals and
construction groups were offset by revenue decreases in the other market
groups. Volume gains were more than offset by lower revenue per unit.
However, almost all of the volume increase and revenue per unit decrease
were mixing-center related (see the discussion under the "Automotive"
caption, below). Revenues for the remaining market groups declined
$76 million, $60 million of which resulted from lower traffic volume and
$16 million of which resulted from lower revenue per unit that was
mitigated by favorable effects from changes in traffic mix.
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
($ in millions) 1999 vs. 1998 1998 vs. 1997
--------------- ------------- -------------
Volume $ 1,007 $ 48
Revenue per unit/mix (114) (50)
------- -------
Total $ 893 $ (2)
======= =======
PAGE 27
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
COAL tonnage increased 18% in 1999, but revenues increased by only
5%. The positive revenue effects of tonnage handled in the Northern
Region were largely offset by significantly lower export coal tonnage. In
addition, a larger proportion of the Northern Region traffic is shorter-
haul (lower average revenue) traffic. Coal revenues represented 26% of
total railway operating revenues in 1999, and 88% of coal shipments
originated on lines operated by NS Rail. In 1998, coal tonnage was
unchanged compared with 1997, but revenues decreased 4%. An increase in
utility tonnage, especially shorter-haul traffic, helped offset decreases
in longer-haul (higher average revenue) export and domestic metallurgical
traffic.
TOTAL COAL, COKE AND IRON ORE TONNAGE
(In millions of tons) 1999 1998 1997
--------------------- ---- ---- ----
Utility 108 83 76
Export 18 25 29
Domestic metallurgical 22 18 21
Other 10 8 8
--- --- ---
Total 158 134 134
=== === ===
Utility coal traffic increased 30% in 1999, due to the expansion of
operations into the Northern Region.
In 1998, utility coal traffic increased 9%, due to rising
electricity production, the return of some traffic to rail and increased
business from several customers.
The near-term outlook for utility coal remains positive. U.S. demand
for electricity continues to increase at a rate greater than generation
capacity is being added, and coal-fired generation continues to be the
cheapest marginal source of electricity. Many underutilized coal-fired
power plants are making the transition from peak-only generation to full-
time generation. NS Rail also could benefit from access to several
utility coal customers not now receiving coal by rail. However,
competitive pressures on utilities to reduce costs could put price
pressure on generation source fuels, including NS Rail-delivered coal.
NS Rail continues to work with utility customers to reduce the delivered
price of coal by developing more efficient coal handling facilities,
which lead to more efficient train operations.
Many of the mines served by NS Rail produce coals that satisfy the
Phase II requirements of the Clean Air Act Amendments. In the Northern
Region, NS Rail now has access to high-quality, low-cost coal that can be
blended with coal from the Powder River Basin to meet the Phase II
requirements. In addition, substantial banks of sulfur dioxide allowances
held by many NS Rail-served utilities should continue to provide a market
for other NS Rail-served mines for nearly a decade. However, more
stringent environmental rules have been promulgated and are scheduled to
be implemented during the next decade, some as early as 2003. Most of
these rules are being challenged in court; but, if they survive and are
implemented, they could increase the cost of coal-fired generation. Also,
the Kyoto Protocol, if ratified and implemented, could put additional
cost pressures on some coal-fired generation.
A recent decision by a federal district court judge in West Virginia
holds that some common mountaintop mining practices in the coal industry
are illegal. There are a small number of mountaintop mining operations on
NS Rail's lines; however, if sustained, the decision could have an
adverse effect on these coal mining operations and on NS Rail's coal
traffic and revenues.
PAGE 28
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Export coal tonnage decreased 28% in 1999, despite additional
traffic handled in the Northern Region. The lower traffic resulted from
reduced demand for U.S. coking coal (in part, the result of a strong U.S.
dollar), productivity gains made by foreign producers, lower ocean
transportation rates and lower foreign royalties. Steam coal exports
continued to be noncompetitive on price, making domestic markets more
attractive for U.S. producers.
In 1998, export coal tonnage decreased 14%, due to weak economies in
Asia and a strong U.S. dollar. The dollar gained 20% or more compared
with the currencies of other countries (such as Australia, South Africa
and Indonesia) that provide the primary competition for U.S. export coal.
A significant decline in Asian demand for coal created supplies that
competed at deeply discounted prices with U.S. export coal in Europe and
South America. Steam coal exports declined to 0.4 million tons in 1998,
compared with 1.7 million tons in 1997. U.S. low-sulfur coals were not
price-competitive due to lower-cost foreign production and the strength
of the dollar.
Export coal tonnage is expected to continue to suffer from the
effects of strong global competition. Despite rising steel production,
continued pricing pressure from foreign producers is expected to keep
demand for U.S. coking coal weak. In addition, the Kyoto Protocol, if
implemented, could increase pressure to reduce the use of carbon-based
fuels.
Domestic metallurgical coal, coke and iron ore traffic increased 22%
in 1999, as the addition of Northern Region traffic more than offset the
effects of reduced U.S. steel production. Lower-priced steel imports led
to reduced production levels at integrated steel manufacturers,
especially through the first three quarters of 1999, thereby dampening
demand for raw materials.
In 1998, domestic metallurgical coal, coke and iron ore traffic
declined 14%, due to plant closures, reduced blast furnace operations and
the continuation of aggressive producer pricing of high-volatile
metallurgical coals not located on NS Rail's lines.
Domestic metallurgical coal, coke and iron ore traffic is expected
to benefit from recent strengthening of domestic and foreign steel
markets. Several domestic blast furnaces are expected to resume
production in 2000. However, long-term demand is expected to continue to
decline, due to advanced technologies that allow production of steel
using less coal.
Other coal traffic, primarily steam coal shipped to manufacturing
plants, increased 25% in 1999, due to the expansion of operations in the
Northern Region, and was flat in 1998.
GENERAL MERCHANDISE traffic volume (carloads) increased 24%, and
revenues increased 26%, in 1999, due to the addition of Northern Region
traffic. Service issues resulted in traffic diversions in all market
groups. In 1998, traffic volume increased 5%, and revenues increased 2%,
driven by higher automotive revenues.
Automotive traffic volume increased 26%, and revenues increased 31%,
in 1999, largely reflecting the expansion of operations in the Northern
Region and record vehicle production. The new NS Rail-served Toyota plant
in Princeton, Ind., and the new vehicle parts distribution center in
Dayton, Ohio, also contributed to the increase. NS Rail's mixing center
network is not yet fully utilized due to network design and service
issues and equipment shortages caused by extended cycle times. In
addition, service issues after the Closing Date resulted in significant
traffic diversions.
In 1998, automotive carloads increased 35%, and revenues increased
15%. Finished vehicles led the growth, as carloads increased 54% and
revenues increased 19%, primarily due to new business through the Ford
mixing centers. Full production volume at the Mercedes-Benz plant in
Vance, Ala., and the Toyota minivan line at Georgetown, Ky., also
contributed to the increases. Vehicle parts traffic volume and revenues
remained steady despite the effects of the mid-year strike at General
Motors.
PAGE 29
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
A substantial portion of the 1998 increase in carloads resulted from
the nature of the mixing centers. Previously, carloads of vehicles went
from plant to distribution center, where vehicles were classified and
loaded onto trucks for transport to dealers. Now, carloads of vehicles,
mostly in unit-train service, go from plant to the mixing centers, where
vehicles are sorted by destination and loaded onto other trains in a mix
suitable for direct transport to dealers. As a result, carload counts
have increased; each vehicle that is handled through the centers arrives
on one carload and departs on another carload. This hub-and-spoke method
of distribution is intended to improve Ford's delivery logistics and
reduce its inventory costs and order-to-delivery times.
Light vehicle production in 2000 is expected to decline 3% from the
record level of 1999. However, NS Rail expects to recapture diverted
traffic as its service improves and to benefit from increased shipments
of finished vehicles from Ford's Norfolk, Va., assembly plant and from
the introduction of new sport utility vehicles at BMW's Greer, S.C.,
assembly plant and at Toyota's second plant in Princeton, Ind., and
increased parts business from General Motors.
Chemicals traffic volume increased 18%, and revenues increased 25%,
in 1999, due to the addition of Northern Region traffic. Chemical
production increased slightly during the year, but fertilizer production
declined. In addition, significant production cutbacks at plants served
by NS Rail affected shipments of both sulfur and fertilizer. Shipments of
chlorine, caustic soda and PVC plastics rebounded from 1998 levels,
benefiting from an improved Asian economy. The location of new and
expanded processing plants on lines NS Rail serves improved shipments of
plastic pellets. Chemicals shipments also increased through NS Rail's
Thoroughbred Bulk Transfer (TBT) facilities that handle chemicals and
bulk commodities for customers not located on lines it serves.
In 1998, chemicals traffic volume decreased 1%, and revenues
decreased 2%, the first decline since 1989. The weak economies in Asia
and softness in certain domestic markets adversely affected shipments of
products for the vinyl, polyester and pulp markets. In addition,
nationwide rail service issues, particularly early in the year, caused
some customers to divert traffic to truck and barge. However, several
NS Rail-served facilities with new and expanded plant capacity increased
shipments of plastics and petroleum products, somewhat offsetting these
reductions. NS Rail also increased traffic through its TBT facilities.
Chemicals revenues in 2000 are expected to benefit from plant
expansions, increases in U.S. chemical production and extended market
reach through the TBT facilities.
Paper, clay and forest products traffic volume increased 4%, and
revenues increased 8%, in 1999, principally due to the expansion of
operations into the Northern Region. The closure of four major paper
mills and some chip mills late in 1998, coupled with the effects of
continued consolidation and weak demand within the paper industry, had a
negative impact on 1999 traffic volume.
In 1998, paper, clay and forest products traffic volume decreased
3%, and revenues declined 1%. Traffic volume increases in the first three
quarters were offset by a sudden and pronounced weakness in the paper
industry in the fourth quarter, adversely affecting shipments of paper,
wood fiber and kaolin clay. Decreased domestic and foreign demand
resulted in both widespread paper mill downtime late in the year and
indefinite closure of several NS Rail-served paper mills. Record carloads
and revenues from shipments of lumber and wood products to meet demand in
the housing construction industry partially offset the effects of these
declines.
The paper industry is expected to continue to experience weak demand
during 2000.
Metals and construction traffic volume increased 57%, and revenues
increased 51%, in 1999, due to the addition of Northern Region traffic.
NS Rail's expanded operations give it access to numerous steel mills,
processors and distribution facilities. Continued growth from new mini-
mills and steel processors locating in NS Rail's service territory offset
PAGE 30
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
the effects of a weaker scrap market. Construction traffic benefited
from continued strength in housing starts and highway construction in
the Southeast. Agricultural limestone shipments were higher in the
first half of the year, due to an early planting season as a result
of the mild winter. In addition, new cement terminals on NS Rail's
lines generated additional traffic.
In 1998, metals and construction traffic volume was unchanged, and
revenues increased 1%. The strong performance in the metals market during
1997 was repeated in the first half of 1998, due to improved efficiency
at integrated mills and the continued growth of new mini-mills and steel
processors in NS Rail's service territory. However, the domestic metals
market weakened in the second half of 1998, due to an increase in the
supply of lower-priced, imported steel. Construction traffic and revenues
increased, due to increased highway and housing construction activity in
the Southeast.
Metals revenues are expected to show the benefits of continued
strength in the steel and construction industries.
Agriculture, consumer products and government traffic volume
increased 15%, and revenues increased 18%, in 1999, reflecting new access
to the large Northeast consumer markets. Service issues that arose early
in the year due to harsh weather conditions and continued during efforts
to integrate the Northern Region had an adverse effect on traffic volume.
In addition, soybean traffic was negatively affected by low-priced
imports from South America.
In 1998, agriculture, consumer products and government traffic
volume decreased 3%, and revenues declined 2%. Weak export and soybean
meal markets adversely affected shipments. Sweeteners volume and revenues
declined, as a strong beet sugar crop negatively affected cane sugar
shipments out of the South. Increased revenues from grain, soybeans and
feed ingredients from the longer-haul Southeast feed and corn processing
markets somewhat offset the effects of the declines.
Moderate growth is expected in 2000 as service levels improve and
more benefits are realized from NS Rail's expanded operations. Continued
low prices and abundant supply are expected to increase consumption of
corn for feed and processing. However, the export market for other grain
products is expected to remain weak.
INTERMODAL traffic volume increased 31%, and revenues increased 39%,
in 1999, due to the addition of Northern Region traffic. NS was awarded
the majority of Conrail's postal business, and NS Rail provides the rail
service related to that business. Intermodal traffic volume declined in
the first five months of 1999, reflecting the network redesign
implemented in August 1998 which pared a significant number of lanes and
associated volumes. Service issues following the integration of the
Northern Region also negatively affected volume and revenues.
In 1998, intermodal traffic volume decreased 2%, and revenues
decreased 1%. The decline, the first in 12 years, was due to the service
network redesign that was implemented in August. As a result, trailer
traffic volume declined 16%, but this decrease was largely offset by
increases in both container traffic volume and revenues (respectively, 2%
and 5%) and TCS traffic volume and revenues (respectively, 5% and 9%).
Intermodal revenues are expected to continue to benefit from the
expansion of operations in the Northeast, as well as terminal and line
capacity expansions and equipment additions. However, APL, which
generated 247,000 units of annualized volume on NS Rail, moved almost all
of this volume to CSX after their strategic alliance. Most of this
traffic had been shifted by December 1999.
PAGE 31
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Railway Operating Expenses
- --------------------------
Railway operating expenses increased 45% in 1999, while carloadings
increased 24%. The expense increase was principally attributable to the
commencement of operations in the Northern Region, and includes
significant costs arising from the service issues experienced after the
Closing Date and the contractual obligations incurred on the Closing
Date. In addition, a licensing fee for the use of certain intangible
assets owned by NS that became effective Nov. 1, 1998, also contributed
to the increase in expenses (see Note 2, "General," on Page 48).
Railway operating expenses increased 6% in 1998, while carloadings
increased 1%. The expense increase was mostly attributable to Conrail-
related integration expenses, and additional expenses, including start-up
costs, related to the Ford mixing centers.
As a result, the railway operating ratio, which measures the
percentage of railway revenues consumed by railway expenses, was 90.2% in
1999, compared with 75.3% in 1998 and the record-low 71.3% in 1997.
Management estimates that the integration-related service issues in
the Northern Region, including estimated traffic diversions, resulted in
almost half of the increase in the railway operating ratio in 1999. The
$168 million of contractual obligations incurred on the Closing Date
increased the railway operating ratio by 3.3 percentage points. The
remaining increase was attributable to: (1) the change in traffic mix
(more resource-intensive traffic, such as automotive and intermodal) and
the new traffic in the Northern Region, coupled with the decrease in
export coal traffic; and (2) the NS licensing fee.
In 1998, the railway operating ratio was adversely affected by
Conrail-related integration expenses and a change in traffic mix related
to the growth in automotive traffic coupled with the change in coal
traffic mix. Automotive traffic includes some of NS Rail's most time-
sensitive and resource-intensive business, requiring more trains,
increased handling costs and higher equipment rents.
The railway operating ratio is not expected to return to pre-Closing
Date levels in the near term, due to changes in NS Rail's traffic mix and
the higher cost structure of the Conrail properties it now operates.
However, the railway operating ratio is expected to show favorable year-
to-year comparisons after the first quarter of 2000.
RAILWAY OPERATING RATIO
(Shown as a graph in the Annual Report to Stockholders)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
90.2% 75.3% 71.3% 71.6% 73.5%
The following table shows the changes in railway operating expenses
summarized by major classifications.
RAILWAY OPERATING EXPENSES
Increases (Decreases)
($ in millions) 1999 vs. 1998 1998 vs. 1997
--------------- ------------- -------------
Compensation and benefits $ 475 $ 87
Materials, services and rents 373 118
Conrail rents and services 279 --
Depreciation 29 18
Diesel fuel 81 (53)
Casualties and other claims 43 (28)
Other 153 26
------- -------
Total $ 1,433 $ 168
======= =======
PAGE 32
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Compensation and benefits, which represented 43% of total railway
operating expenses, increased 32% in 1999 and 6% in 1998.
In 1999, the increase resulted largely from the almost 50% increase
in the railroad work force following commencement of operations in the
Northern Region. The service issues encountered after the expansion of
operations also contributed to the increase, including $49 million for
the Special Work Incentive Program available to union employees during
much of the third quarter. In addition, the contractual obligations
incurred in employing a substantial portion of Conrail's work force also
contributed to the increase. These increases were mitigated by reduced
stock-based incentive compensation, the absence of bonus accruals and
reduced pension and other postretirement benefits expenses. NS has
substantial unrecognized gains relating to its over-funded pension plan;
amortization of these gains will continue to be included in NS Rail's
"Compensation and benefits" expenses (see Note 13 on Page 58).
In 1998, higher wages and salaries -- results of additional staffing
in anticipation of the Closing Date and union wage increases, including
the effect of an increase in the bonus fund for locomotive engineers --
were offset somewhat by lower expenses for pension benefits, due to
favorable investment returns on pension plan assets. Also contributing to
the increase were new FRA train inspection requirements and a higher
Railroad Unemployment Tax rate.
In January 2000, NS announced a voluntary early retirement program
that included enhancements to pension benefits for eligible nonunion
employees. Approximately 1,180 employees, or 20% of NS' nonunion work
force, were eligible for the program; and 916 accepted and retired
effective March 1. Benefits will be paid out of NS' over-funded pension
plan. Actions also were taken in the first quarter of 2000 to reduce the
size of the union work force. These work force reduction efforts were
taken to resize employment levels and reduce operating expenses in
response to changes in NS Rail's business. The cost of these work force
reductions will be reflected in NS Rail's expenses in the first quarter
of 2000.
Materials, services and rents expenses include items used for the
maintenance of the railroads' lines, structures and equipment; the costs
of services purchased from outside contractors, including the net costs
of operating joint (or leased) facilities with other railroads; and the
net cost of equipment rentals. This category of expenses increased 46% in
1999 and 17% in 1998.
The 1999 increase reflected the expanded operations in the Northern
Region and additional costs attributable to the service issues, including
costs for alternate transportation to meet the needs of customers.
The 1998 increase was principally due to Conrail-related integration
costs and higher-than-anticipated mixing center costs associated with the
increase in automotive traffic. Higher equipment rents and locomotive
repair expenses also contributed to the increase.
Equipment rents, which represent the cost to NS Rail of using
equipment (mostly freight cars) owned by other railroads or private
owners, less the rent paid to NS Rail for the use of its equipment,
increased 93% in 1999 and 18% in 1998. The 1999 increase principally was
due to: (1) increased volume attributable to expanded operations;
(2) higher rental costs for freight cars, as service issues increased car
cycle times; and (3) costs for short-term locomotive leases to improve
system fluidity. In addition, Conrail historically rented a higher
percentage of its freight cars than has NS Rail, resulting in higher
equipment rents in the Northern Region. The 1998 increase was due to:
(1) rents for equipment needed to support the increase in automotive
traffic; (2) reduced rents received from the leasing of owned
locomotives; and (3) increased lease expenses for equipment obtained to
meet anticipated demand after the Closing Date. These 1998 increases were
somewhat offset by higher receipts on NS Rail-owned freight cars and auto
racks.
PAGE 33
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Locomotive and car repair costs increased in 1999 due to the
expansion of operations and to the higher repair costs associated with
the leased locomotives. Locomotive repair costs increased in 1998 due to
the higher traffic levels and an increase in the average number of
locomotives in service, reflecting the retention of older units.
Conrail rents and services, a new category of expense arising from
the expansion of operations on June 1, amounted to $279 million in 1999.
This item includes amounts due to PRR and CRC for: (1) use of their
operating properties and equipment; (2) CRC's operation of the Shared
Assets Areas; and (3) CRC's operation of certain transition facilities.
Depreciation expense (see Note 1, "Properties," on Page 48 for NS
Rail's depreciation policy) was up 7% in 1999 and 4% in 1998. Increases
in both years were due to property additions, reflecting recent
substantial levels of capital spending.
Diesel fuel expenses increased 47% in 1999, but declined 23% in
1998. The increase in 1999 resulted from a 19% increase in the average
price per gallon, due to a sharp rise in the last half of the year, and
higher consumption, primarily the result of the additional Northern
Region traffic. The 1998 decrease was due to a 26% drop in the average
price per gallon, which was the lowest since 1988, somewhat offset by a
3% increase in consumption.
Casualties and other claims expenses (including the estimates of
costs related to personal injury, property damage and environmental
matters) increased 45% in 1999, but decreased 23% in 1998. The 1999
increase principally resulted from higher personal injury accruals
related to the increased size of the work force as well as higher
environmental expenses. The 1998 decrease was due to cost recoveries from
third parties and lower accruals for environmental remediation costs and
to reduced personal injury expenses.
The largest component of casualties and other claims expense is
personal injury costs. Costs related to so-called "occupational" injuries
continued to increase. Within the past decade, there has been a dramatic
increase in the number of these types of claims. In 1999, about two-
thirds of the total employee injury cases settled and one-quarter of
settlement payments made were related to occupational claims. These
claims generally do not relate to a specific accident or event, but
rather result from a claimed exposure over time to some condition of
employment. As a result, many of these claims are asserted by former or
retired employees. NS Rail continues to work actively to eliminate all
accidents and exposure risks and to control associated costs.
The rail industry remains uniquely susceptible to litigation
involving job-related accidental injury and occupational claims because
of an outmoded law, the Federal Employers' Liability Act (FELA),
originally passed in 1908 and applicable only to railroads. This law,
which covers employee claims for job-related injuries, promotes an
adversarial claims environment and produces results that are
unpredictable and inconsistent, at a far greater cost to the rail
industry than the no-fault workers' compensation system to which nonrail
competitors and other employers are universally subject. The railroads
have been unsuccessful so far in efforts to persuade Congress to replace
FELA with a no-fault workers' compensation system.
NS Rail maintains substantial amounts of commercial insurance for
potential third-party liability and property damage claims. It also
retains reasonable levels of risk through self-insurance.
PAGE 34
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Other expenses increased 87% in 1999 and 17% in 1998. The 1999
increase resulted from: (1) a licensing fee for the use of certain
intangible assets owned by NS that became effective Nov. 1, 1998 (see
Note 2, "General," on Page 48); (2) the expansion of operations,
including property and other taxes related to the Northern Region; and
(3) costs arising from the service issues. The 1998 increase principally
resulted from: (1) the licensing fee charged by NS; (2) higher property
and other taxes, due to the effects of favorable adjustments in prior
years resulting from settlements with taxing authorities; and
(3) increased travel expenses, mostly attributable to planning for the
Conrail transaction.
Income Taxes
- ------------
Income tax expense in 1999 was $174 million, for an effective rate
of 34%, compared with an effective rate of 35% in 1998 and 34% in 1997.
The effective rates in all three years were below the statutory
federal and state rates -- results of favorable adjustments upon filing
the prior year tax returns and favorable adjustments to state tax
liabilities. In addition, 1998 and 1997 benefited from investments in
corporate-owned life insurance, and 1998 benefited from favorable
adjustments resulting from settlement of federal income tax years 1993
and 1994.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS Rail's principal source of
liquidity, decreased $821 million, or 59%, in 1999, and $30 million, or
2%, in 1998. Both declines reflected the reductions in income from
operations, mitigated somewhat by lower income tax payments. In addition,
1999 was affected by NS Rail's dividend of accounts receivable to NS (see
Note 2, "Noncash Dividends," on Page 50). The large changes in "Accounts
receivable" and "Other short-term liabilities" in the 1999 cash flow
statement reflect the commencement of operations in the Northern Region.
Cash used for investing activities in 1999 decreased 19%, but
increased slightly in 1998. Investing activities in 1999 included
approximately $160 million more of borrowings against the net cash
surrender value of company-owned life insurance, compared with 1998. In
addition, 1999 included $60 million in proceeds from the sale of certain
licensing arrangements and the sale of NS Rail's signboard business.
Property additions account for most of the spending in this category.
The following tables show capital spending, track and equipment
statistics for the past five years. Capital expenditures include amounts
relating to capitalized leases, which are excluded from the Consolidated
Statements of Cash Flows (see Note 8, "Capital Lease Obligations," on
Page 56).
CAPITAL EXPENDITURES
(Also shown as a graph in the Annual Report to Stockholders)
($ in millions) 1999 1998 1997 1996 1995
--------------- ---- ---- ---- ---- ----
Road $ 559 $ 583 $ 580 $ 428 $ 379
Equipment 356 419 304 326 333
Other property -- -- -- -- 1
------- ------- ------- ------- -------
Total $ 915 $ 1,002 $ 884 $ 754 $ 713
======= ======= ======= ======= =======
PAGE 35
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Capital expenditures decreased 9% in 1999, but increased 13% in
1998. Both variances were largely attributable to significant outlays in
1998 for roadway projects and equipment in anticipation of the Closing
Date. In addition, 1997 and 1998 included significant expenditures for
automotive-related projects.
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Track miles of rail
installed 403 429 451 401 403
Miles of track
surfaced 5,087 4,715 4,703 4,686 4,668
New crossties
installed (millions) 2.3 2.0 2.2 1.9 2.0
AVERAGE AGE OF OWNED RAILWAY EQUIPMENT
(In years) 1999 1998 1997 1996 1995
---------- ---- ---- ---- ---- ----
Freight cars 24.4 23.6 23.0 22.3 22.0
Locomotives 15.4 15.4 15.3 15.4 15.7
Retired locomotives 22.7 20.6 23.3 24.4 22.6
In addition to NS Rail-owned equipment, approximately 20% of the
freight car fleet and 30% of the locomotive fleet is leased from PRR (see
Note 2 on Page 48).
The 1998 decrease in the average age of retired locomotives resulted
from a disproportionate share of early retirements due to casualties and
service failures and retention of older units in anticipation of the
Closing Date.
Since 1988, NS Rail has rebodied about 29,000 coal cars, and plans
to continue that program at least through the first half of 2000. This
work, performed at NS Rail's Roanoke Car Shop, converts hopper cars into
high-capacity steel gondolas or hoppers. As a result, the remaining
service life of the freight car fleet is greater than may be inferred
from the increasing average age shown in the table, above.
For 2000, NS Rail has budgeted $747 million for capital
expenditures. In addition, NS Rail plans to enter into a lease financing
arrangement for 150 new locomotives. The anticipated spending includes
$576 million for roadway projects, of which $284 million is for track and
bridge program work. Also included are projects to increase track and
terminal capacity. Equipment spending includes the rebodying of coal and
coke hoppers, the purchase of 255 multilevel automobile racks, the
upgrading of existing locomotives and the modification of open coil steel
cars. NS Rail also plans to lease 475 articulated bilevels for automobile
service.
Cash flows from financing activities in 1999 were significantly
affected by NS Rail's dividend of accounts receivable to NS: absent this
dividend, NS Rail likely would have advanced to NS the cash received for
collection of those receivables. "Advances to NS" typically account for
most of the cash used for financing activities and reflect NS'
requirements (see Note 2 on Page 48). Proceeds from borrowings included
amounts received in 1999 and 1998 from the sale of equipment trust
certificates and $149 million of borrowings in 1999 from a PRR subsidiary
(see Note 2 on Page 48).
NS is subject to various financial covenants with respect to its
debt and under its credit agreement, including a minimum net worth
requirement, a maximum leverage ratio restriction and certain
restrictions on issuance of further debt. As the major NS subsidiary, NS
Rail is subject to certain of those covenants.
PAGE 36
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
OTHER MATTERS
Proposed CN-BNSF Combination
- ----------------------------
On Dec. 20, 1999, Canadian National Railway Company and Burlington
Northern Santa Fe Corporation announced plans to combine their companies
under common control, thereby forming the largest railroad in North
America. NS Rail and other Class I railroads have expressed strong
concerns about both the timing and the implications for the railroad
industry of the proposed combination; moreover, the Surface
Transportation Board (which would have to approve the combination) has
indicated that the carriers will be expected to address the "cumulative
impacts and crossover effects" of the transaction. Management will
monitor developments and take appropriate actions.
Market Risks and Hedging Activities
- -----------------------------------
NS Rail does not engage in the trading of derivatives. NS Rail
manages its overall exposure to fluctuations in interest rates by issuing
both fixed- and floating-rate debt instruments and by entering into
interest-rate hedging transactions to achieve a targeted mix within its
debt portfolio.
Of NS Rail's total debt outstanding (see Note 8 on Page 55), all is
fixed-rate debt, except for most capital leases. As a result, NS Rail's
debt subject to interest rate exposure was $281 million on Dec. 31, 1999.
A 1% increase in interest rates would increase NS Rail's total annual
interest expense related to all its variable debt by approximately $3
million. Management considers it unlikely that interest rate fluctuations
applicable to these instruments will result in a material adverse effect
on NS Rail's financial position, results of operations or liquidity.
The capital leases, which carry an average fixed rate of 7.1%, were
effectively converted to variable rate obligations using interest rate
swap agreements. On Dec. 31, 1999, the average pay rate under these
agreements was 6.3%, and the average receive rate was 7.1%. During 1999,
the effect of the swaps was to reduce interest expense by $4 million. A
portion of the lease obligations is payable in Japanese yen. NS Rail
hedged the associated exchange rate risk at the inception of each lease
with a yen deposit sufficient to fund the yen-denominated obligation.
Most of these deposits are held by Japanese banks. As a result, NS Rail
is exposed to financial market risk relative to Japan. Counterparties to
the interest rate swaps and Japanese banks holding yen deposits are major
financial institutions believed by Management to be creditworthy.
Accounting Changes and New Pronouncements
- -----------------------------------------
As discussed in Note 1 under "Required Accounting Changes" on
Page 48, NS Rail adopted AICPA Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use" in 1999.
During 1999, the Financial Accounting Standards Board deferred the
effective date of Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities." NS
Rail expects to adopt SFAS No. 133 effective Jan. 1, 2001. This adoption
is not expected to have a material effect on NS Rail's consolidated
financial statements.
Lawsuits
- --------
Norfolk Southern Railway Company and certain subsidiaries are
defendants in numerous lawsuits relating principally to railroad
operations.
On Sept. 8, 1997, a state court jury in New Orleans returned a
verdict awarding $175 million in punitive damages against The Alabama
Great Southern Railroad Company (AGS), a subsidiary of Norfolk Southern
Railway Company. The verdict was returned in a class action suit
PAGE 37
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
involving some 8,000 individuals who claim to have been damaged as the
result of an explosion and fire that occurred in New Orleans on
Sept. 9, 1987, when a chemical called butadiene leaked from a tankcar.
The jury verdict awarded a total of nearly $3.2 billion in punitive
damages against four other defendants in the same case: two rail
carriers, the owner of the car and the shipper. Previously, the jury had
awarded nearly $2 million in compensatory damages to 20 of the more than
8,000 individual plaintiffs. Prior to the trial court's ruling on the
post trial motions, AGS and four other defendants agreed to settle their
liability in this case for a total payment of approximately $150 million,
of which AGS' share was $15 million. The settlement has been given
preliminary approval by the trial court, and the money has been paid into
an escrow account maintained by Bank One Trust Company in New Orleans.
Final approval of the settlement and distribution of the settlement
proceeds to qualified members of the class are subject to a fairness
hearing scheduled for March 22, 2000.
While it is possible that the trial court will decline to give final
approval to the settlement, or that the settlement may be overturned on
appeal, Management believes that the settlement is a fair resolution of
this controversy and that disapproval by the courts is unlikely.
While the final outcome of this matter and other lawsuits cannot be
predicted with certainty, it is the opinion of Management, based on known
facts and circumstances, that the amount of NS Rail's ultimate liability
is unlikely to have a material adverse effect on NS Rail's financial
position, results of operations or liquidity.
Environmental Matters
- ---------------------
NS Rail is subject to various jurisdictions' environmental laws and
regulations. It is NS Rail's policy to record a liability where such
liability or loss is probable and its amount can be estimated reasonably.
Claims, if any, against third parties for recovery of cleanup costs
incurred by NS Rail are reflected as receivables (when collection is
probable) in the balance sheet and are not netted against the associated
NS Rail liability. Environmental engineers regularly participate in
ongoing evaluations of all identified sites and in determining any
necessary adjustments to initial liability estimates. NS Rail also has
established an Environmental Policy Council, composed of senior managers,
to oversee and interpret its environmental policy.
Operating expenses for environmental matters totaled approximately
$12 million in 1999, $4 million in 1998 and $21 million in 1997, and
capital expenditures totaled approximately $8 million in 1999, $7 million
in 1998 and $6 million in 1997. The increase in operating expenses in
1999 compared with 1998 was principally due to a combination of
unfavorable development experience on identified sites during 1999, and
higher recoveries in 1998 from third parties of amounts paid by NS Rail
in prior years for environmental cleanup and remediation. Capital
expenditures in 2000 are expected to be comparable with 1999.
As of Dec. 31, 1999, NS Rail's balance sheet included a reserve for
environmental exposures in the amount of $41 million (of which $8 million
is accounted for as a current liability), which is NS Rail's estimate of
the probable cleanup and remediation costs based on available information
at 126 identified locations. On that date, 12 sites accounted for
$20 million of the reserve, and no individual site was considered to be
material. NS Rail anticipates that much of this liability will be paid
out over five years; however, some costs will be paid out over a longer
period.
At some of the 126 locations, certain NS Rail subsidiaries, usually
in conjunction with a number of other parties, have been identified as
potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, or comparable state
statutes, which often impose joint and several liability for cleanup
costs.
PAGE 38
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
With respect to known environmental sites (whether identified by NS
Rail or by the EPA or comparable state authorities), estimates of NS
Rail's ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available cleanup techniques, the
likely development of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and regulatory
standards governing liability.
The risk of incurring environmental liability -- for acts and
omissions, past, present and future -- is inherent in the railroad
business. Some of the commodities in NS Rail's traffic mix, particularly
those classified as hazardous materials, can pose special risks that NS
Rail and its subsidiaries work diligently to minimize. In addition,
several NS Rail subsidiaries own, or have owned, land used as operating
property, or which is leased or may have been leased and operated by
others, or held for sale.
Because environmental problems that are latent or undisclosed may
exist on these properties, there can be no assurance that NS Rail will
not incur environmentally related liabilities or costs with respect to
one or more of them, the amount and materiality of which cannot be
estimated reliably at this time. Moreover, lawsuits and claims involving
these and other now-unidentified environmental sites and matters are
likely to arise from time to time. The resulting liabilities could have a
significant effect on financial condition, results of operations or
liquidity in a particular year or quarter.
However, based on its assessments of the facts and circumstances now
known, Management believes that it has recorded the probable costs for
dealing with those environmental matters of which the Corporation is
aware. Further, Management believes that it is unlikely that any
identified matters, either individually or in the aggregate, will have a
material adverse effect on NS Rail's financial position, results of
operations or liquidity.
Labor Agreements
- ----------------
Approximately 85% of NS Rail's employees are represented by labor
unions under collective bargaining agreements with 14 different labor
organizations. Moratorium provisions of the agreements currently in force
expired Dec. 31, 1999; however, the agreements remain in effect until
amendments are agreed to or until the Railway Labor Act's procedures are
exhausted. In late 1999, negotiations began at the national level on
agreements with major labor organizations. The outcome of these
negotiations is uncertain at this time. However, a tentative agreement
was reached with the Brotherhood of Locomotive Engineers which represents
approximately 5,000 of NS Rail's locomotive engineers. The settlement
requires ratification by the members before acceptance. Negotiations with
the other unions are progressing.
Inflation
- ---------
Generally accepted accounting principles require the use of
historical cost in preparing financial statements. This approach
disregards the effects of inflation on the replacement cost of property.
NS Rail, a capital-intensive company, has most of its capital invested in
such assets. The replacement cost of these assets, as well as the related
depreciation expense, would be substantially greater than the amounts
reported on the basis of historical cost.
PAGE 39
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Trends
- ------
- Federal Economic Regulation -- Efforts may be made in 2000 to re-
subject the rail industry to unwarranted federal economic regulation. The
Staggers Rail Act of 1980, which substantially reduced such regulation,
encouraged and enabled rail carriers to innovate and to compete for
business, thereby contributing to the economic health of the nation and
to the revitalization of the industry. Accordingly, NS Rail and other
rail carriers vigorously will oppose these counterproductive efforts to
reimpose or to authorize reimposing such economic regulation.
- Reduction of "Greenhouse" Gases -- In December 1997, international
environmental officials meeting in Kyoto, Japan, agreed to reduce
substantially the emission of so-called "greenhouse" gases by 2010.
Agreement on such reductions was reached on the basis of questionable
scientific evidence and in spite of the fact that the burden of the
reduction regimen will be borne disproportionally by developed nations
such as the United States. NS Rail, the rail industry and a wide variety
of other affected constituencies in the United States expect to assure
that, prior to a Senate vote on the proposed treaty, the public and
governmental authorities have available to them additional scientific
information and data concerning other effects that are likely to result
from implementation.
- Utility Deregulation -- Deregulation of the electrical utility
industry is expected to increase competition among electric power
generators; deregulation over time would permit wholesalers and possibly
retailers of electric power to sell or purchase increasing quantities of
power to or from far-distant parties. The effects of deregulation on NS
Rail and on its customers cannot be predicted with certainty; however, NS
Rail serves a number of efficient power producers and is working
diligently to assure that its customers remain competitive in this
evolving environment.
Forward-Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Annual Report contain
forward-looking statements that are based on current expectations,
estimates and projections. Such forward-looking statements reflect
Management's good-faith evaluation of information currently available.
However, because such statements are based upon and, therefore, can be
influenced by, a number of external variables over which Management has
no, or incomplete, control, they are not, and should not be read as
being, guarantees of future performance or of actual future results; nor
will they necessarily prove to be accurate indications of the times at or
by which any such performance or result will be achieved. Accordingly,
actual outcomes and results may differ materially from those expressed in
such forward-looking statements. This caveat has particular importance in
the context of all such statements that relate to the resolution of the
service issues, the recapture of diverted business, the addition of new
business, and the ability to reduce expenses.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
- ------- ----------------------------------------------------------
The information required by this item is included in Part II,
Item 7, "Management's Discussion and Analysis of Financial Conditions
and Results of Operations," on Page 36 under the heading "Market Risks
and Hedging Activities."
PAGE 40
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Quarterly Financial Data
(Unaudited)
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
($ in millions, except per share amounts)
1999
----
Railway operating revenues $1,030 $1,181 $1,467 $1,436
Income from railway operations 222 22 137 122
Net income 146 13 84 89
Dividends per serial preferred
share $ 0.65 $ 0.65 $ 0.65 $ 0.65
1998
----
Railway operating revenues $1,066 $1,079 $1,048 $1,028
Income from railway operations 251 294 258 240
Net income 168 206 167 184
Dividends per serial preferred
share $ 0.65 $ 0.65 $ 0.65 $ 0.65
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997 41
Consolidated Balance Sheets
As of December 31, 1999 and 1998 42
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 44
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 46
Notes to Consolidated Financial Statements 47
Independent Auditors' Report 65
The Index to Consolidated Financial Statement Schedule appears in
Item 14 on Page 68.
PAGE 41
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions)
RAILWAY OPERATING REVENUES $ 5,114 $ 4,221 $ 4,223
RAILWAY OPERATING EXPENSES:
Compensation and benefits 1,967 1,492 1,405
Materials, services and rents 1,181 808 690
Conrail rents and services (Note 2) 279 -- --
Depreciation 463 434 416
Diesel fuel 255 174 227
Casualties and other claims 138 95 123
Other 328 175 149
------- ------- -------
Railway operating expenses 4,611 3,178 3,010
------- ------- -------
Income from railway operations 503 1,043 1,213
Charge for credit facility costs -- -- (77)
Other income - net (Note 3) 42 90 28
Interest expense on debt (Note 6) (39) (25) (30)
------- ------- -------
Income before income taxes 506 1,108 1,134
Provision for income taxes (Note 4) 174 383 380
------- ------- -------
NET INCOME $ 332 $ 725 $ 754
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
PAGE 42
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
As of December 31,
1999 1998
---- ----
($ in millions)
ASSETS
Current assets:
Short-term investments $ 12 $ 44
Accounts receivable net of allowance for
doubtful accounts of $5 million and $4 million,
respectively 681 508
Due from Conrail (Note 2) 77 --
Materials and supplies 98 59
Deferred income taxes (Note 4) 124 110
Other current assets 144 130
------- -------
Total current assets 1,136 851
Due from NS - net (Note 2) -- 43
Investments (Notes 5 and 14) 624 990
Properties less accumulated depreciation (Note 6) 10,390 9,985
Other assets 482 148
------- -------
TOTAL ASSETS $12,632 $12,017
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 7) $ 787 $ 577
Income and other taxes 132 139
Due to NS - net (Note 2) 483 --
Notes and accounts payable to Conrail (Note 2) 184 --
Other current liabilities (Note 7) 152 73
Current maturities of long-term debt (Note 8) 85 141
------- -------
Total current liabilities 1,823 930
Long-term debt (Note 8) 781 619
Other liabilities (Note 10) 1,044 909
Minority interests 3 2
Deferred income taxes (Note 4) 3,596 3,420
------- -------
TOTAL LIABILITIES 7,247 5,880
------- -------
PAGE 43
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets (continued)
As of December 31,
1999 1998
---- ----
($ in millions)
Stockholders' equity:
Serial preferred stock (Note 11) 55 55
Common Stock (Note 11) 167 167
Additional paid-in capital 673 548
Accumulated other comprehensive income (Note 12) 259 414
Retained income 4,231 4,953
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,385 6,137
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,632 $12,017
======= =======
See accompanying Notes to Consolidated Financial Statements.
PAGE 44
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 332 $ 725 $ 754
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 465 435 417
Deferred income taxes 5 100 70
Charge for credit facility costs -- -- 77
Nonoperating gains on properties and
investments (44) (31) (9)
Accounts receivable dividend to NS
(Note 2) (491) -- --
Changes in assets and liabilities
affecting operations:
Accounts receivable (173) 31 (23)
Materials and supplies (40) (1) 3
Other current assets and due from
Conrail (49) (15) (8)
Income tax liabilities 162 208 180
Other short-term liabilities 269 (11) (1)
Other - net 130 (54) (43)
------ ------ ------
Net cash provided by operating
activities 566 1,387 1,417
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (915) (898) (838)
Property sales and other transactions 65 54 54
Investments, including short-term (105) (97) (175)
Investment sales and other transactions 311 143 165
------ ------ ------
Net cash used for investing
activities (644) (798) (794)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (Note 2) (3) (3) (3)
Credit facility costs paid -- -- (72)
Advances to NS (Note 2) (105) (603) (760)
Advances and repayments from NS (Note 2) 17 6 101
Proceeds from borrowings 337 67 2
Debt repayments (168) (63) (56)
------ ------ ------
Net cash provided by (used for)
financing activities 78 (596) (788)
------ ------ ------
Net increase (decrease) in cash
and cash equivalents -- (7) (165)
CASH AND CASH EQUIVALENTS:
At beginning of year -- 7 172
------ ------ ------
At end of year $ -- $ -- $ 7
====== ====== ======
(continued)
PAGE 45
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows (continued)
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 70 $ 61 $ 60
Income taxes $ 5 $ 74 $ 169
See accompanying Notes to Consolidated Financial Statements.
PAGE 46
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Changes in Stockholders' Equity
Accumu-
Addi- lated Other
Serial tional Compre-
Preferred Common Paid-In hensive Retained
Stock Stock Capital Income Income Total
-------- ------ ------- ---------- -------- -----
($ in millions)
BALANCE DECEMBER 31,
1996 $ 55 $ 167 $ 525 $ 398 $4,627 $5,772
Comprehensive income-
1997
Net income 754 754
Other comprehensive
income (Note 12) 16 16
------
Total comprehensive
income 770
Serial preferred stock,
$2.60 per share cash
dividend (3) (3)
Noncash dividends on
Common Stock (Note 2) (147) (147)
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1997 55 167 525 414 5,231 6,392
Comprehensive income-
1998
Net income 725 725
Other comprehensive
income (Note 12) -- --
------
Total comprehensive
income 725
Serial preferred stock,
$2.60 per share cash
dividend (3) (3)
Noncash dividends on
Common Stock (Note 2) (1,000) (1,000)
Capital contribution
(Note 2) 23 23
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1998 55 167 548 414 4,953 6,137
Comprehensive income-
1999
Net income 332 332
Other comprehensive
income (Note 12) (155) (155)
------
Total comprehensive
income 177
Serial preferred stock,
$2.60 per share cash
dividend (3) (3)
Noncash dividends on
Common Stock (Note 2) (1,051) (1,051)
Capital contribution
(Note 2) 125 125
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1999 $ 55 $ 167 $ 673 $ 259 $4,231 $5,385
====== ====== ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
PAGE 47
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
The following Notes are an integral part of the Consolidated Financial
Statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
- -----------------------
Norfolk Southern Railway Company (NSR), together with its
consolidated subsidiaries (collectively NS Rail), is engaged principally
in the transportation of freight by rail, operating approximately 21,800
route miles, primarily in the East and Midwest (see Note 2). These
financial statements include NSR and its majority-owned and controlled
subsidiaries on a consolidated basis. All significant intercompany
balances and transactions have been eliminated in consolidation.
NS Rail transports raw materials, intermediate products and finished
goods classified in the following market groups: coal; automotive;
chemicals; paper/clay/forest products; metals/construction;
agriculture/consumer products/government; and intermodal. Except for
coal, all groups are approximately equal in size based on revenues; coal
accounts for about 26% of total railway operating revenues. Ultimate
points of origination or destination for some of the freight
(particularly coal bound for export and intermodal containers) are
outside of the United States.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
- ----------------
"Cash equivalents" are highly liquid investments purchased three
months or less from maturity.
Investments
- -----------
Marketable equity and debt securities are reported at amortized cost
or fair value, depending upon their classification as securities "held-to-
maturity," "trading," or "available-for-sale." On Dec. 31, 1999 and 1998,
all "Short-term investments," consisting primarily of United States
government and federal agency securities and all marketable equity
securities consisting principally of NS Common Stock, were designated as
"available-for-sale." Accordingly, unrealized gains and losses, net of
taxes, are recognized in "Accumulated Other Comprehensive Income" (see
Note 12).
Investments where NS Rail has the ability to exercise significant
influence over, but does not control, the entity are accounted for using
the equity method in accordance with APB Opinion No. 18, "The Equity
Method of Accounting for Investments in Common Stock."
Materials and Supplies
- ----------------------
"Materials and supplies," consisting mainly of fuel oil and items
for maintenance of property and equipment, are stated at the lower of
average cost or market. The cost of materials and supplies expected to be
used in capital additions or improvements is included in "Properties."
PAGE 48
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Properties
- ----------
"Properties" are stated principally at cost and are depreciated
using group depreciation. Rail is depreciated primarily on the basis of
use measured by gross ton-miles. Other properties are depreciated
generally using the straight-line method over estimated service or lease
lives. NS Rail capitalizes interest on major capital projects during the
period of their construction. Additions to properties, including those
under lease, are capitalized. Maintenance expense is recognized when
repairs are performed. When properties other than land and nonrail assets
are sold or retired in the ordinary course of business, the cost of the
assets, net of sale proceeds or salvage, is charged to accumulated
depreciation rather than recognized through income. Gains and losses on
disposal of land and nonrail assets are included in "Other Income - Net"
(see Note 3).
NS Rail reviews the carrying amount of properties whenever events or
changes in circumstances indicate that such carrying amount may not be
recoverable based on future undiscounted cash flows or estimated net
realizable value. Assets that are deemed impaired as a result of such
review are recorded at the lower of carrying amount or fair value.
Revenue Recognition
- -------------------
Revenue is recognized proportionally as a shipment moves from origin
to destination.
Derivatives
- -----------
NS Rail does not engage in the trading of derivatives. NS Rail has
entered into a limited number of derivative agreements to hedge interest
rate exposures on certain components of its debt portfolio. All of these
derivative instruments are designated as hedges, have high correlation
with the underlying exposure and are highly effective in offsetting
underlying price movements. Accordingly, payments made or received under
interest rate swap agreements are recorded in the income statement with
the corresponding interest expense.
Required Accounting Changes
- ---------------------------
Effective Jan. 1, 1999, NS Rail adopted AICPA Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Adoption of this pronouncement had no
material effect on NS Rail's consolidated financial statements.
Reclassifications
- -----------------
Certain amounts in the financial statements and Notes thereto have
been reclassified to conform to the 1999 presentation.
2. RELATED PARTIES
General
- -------
Norfolk Southern Corporation (NS) is the parent holding company of
NSR. The costs of functions performed by NS are charged to NS Rail. In
addition, effective Nov. 1, 1998, NS charges NS Rail a revenue-based
licensing fee (which totaled $77 million for 1999) for use of certain
intangible assets owned by NS. Rail operations are coordinated at the
holding company level by the NS Vice Chairman and Chief Operating
Officer.
NS Rail owns 21,627,902 shares of NS common stock.
PAGE 49
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
Operations Over Conrail's Lines
- -------------------------------
Overview -- NS and CSX Corporation (CSX) jointly own Conrail Inc.
(Conrail), whose primary subsidiary is Consolidated Rail Corporation
(CRC), the major railroad in the Northeast. From May 23, 1997, the date
NS and CSX completed their acquisition of Conrail stock, until June 1,
1999, Conrail's operations continued substantially unchanged while NS and
CSX awaited regulatory approvals and prepared for the integration of the
respective Conrail routes and assets to be leased to their railroad
subsidiaries, NSR and CSX Transportation, Inc. (CSXT).
Commencement of Operations -- On June 1, 1999 (the "Closing Date"),
NSR and CSXT began operating as parts of their rail systems the separate
Conrail routes and assets leased to them pursuant to operating and lease
agreements.
The Operating Agreement between NSR and Pennsylvania Lines LLC
(PRR), a wholly owned subsidiary of CRC, governs substantially all
nonequipment assets to be operated by NSR and has an initial 25-year
term, renewable at the option of NSR for two five-year terms. Payments
under the Operating Agreement are subject to adjustment every six years
to reflect changes in values. NSR also has leased or subleased for
varying terms from PRR a number of equipment assets. Costs necessary to
operate and maintain the PRR assets, including leasehold improvements,
are borne by NSR. CSXT has entered into comparable arrangements, for the
operation and use of certain other CRC routes and assets, with another
wholly owned CRC subsidiary.
NSR and CSXT also have entered into agreements with CRC governing
other Conrail properties that continue to be owned and operated by
Conrail (the "Shared Assets Areas"). NSR and CSXT pay CRC a fee for joint
and exclusive access to the Shared Assets Areas. In addition, NSR and
CSXT pay, based on usage, the costs incurred by CRC to operate the Shared
Assets Areas.
Future minimum lease payments due to PRR under the Operating
Agreement and lease agreements and to CRC under the Shared Assets Areas
(SAA) agreements are as follows:
PRR Oper. PRR Lease SAA
($ in millions) Agmt. Agmts. Agmts.
--------------- -------- -------- --------
2000 $ 166 $ 154 $ 22
2001 178 129 24
2002 196 122 27
2003 217 110 30
2004 238 92 32
2005 and subsequent years 5,022 367 687
------- ------- -------
Total $ 6,017 $ 974 $ 822
======= ======= =======
Operating lease expense related to the agreements, which is included
in "Conrail rents and services," amounted to $273 million in 1999.
On the Closing Date, both NS Rail's route miles and its employees
increased by approximately 50 percent. NS Rail and CSXT now provide
substantially all rail freight services on Conrail's route system,
perform or are responsible for performing most services incident to
customer freight contracts and employ the majority of Conrail's former
work force. Consequently, NS Rail began to receive all freight revenues
and incur all expenses on the PRR lines.
Since June 1, 1999, difficulties in integrating the PRR routes and
assets have affected adversely both NS Rail's revenues and expenses.
These higher expenses included the cost of a special incentive program
available to unionized employees for much of the third quarter, higher
labor costs and equipment rents and service alteration costs to meet the
PAGE 50
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
needs of shippers. A long-term failure by NS Rail to integrate successfully
these PRR properties could have a substantial adverse impact on NS Rail's
financial position, results of operations and liquidity.
NS Rail's railway operating expenses in 1999 included $168 million
($103 million after taxes) for contractual obligations, principally to
former Conrail employees. Most of these costs are expected to be paid in
the two years following the Closing Date, and $42 million of such is
classified on NS Rail's balance sheet as "Current liabilities." However,
certain contractual obligations by their terms will be paid out over a
longer period and are classified as "Other liabilities" on NS Rail's
balance sheet. Through Dec. 31, 1999, NS Rail has paid $24 million of
these costs. In addition, NS Rail has incurred $9 million and expects to
incur an additional $10 million of costs for relocations of former
Conrail employees. As definitive plans are determined and communicated,
costs, if any, for severing or relocating NS Rail employees and for
disposing of NS Rail facilities also will be charged to operating
expenses.
Until the Closing Date, NS Rail and CRC had transactions with each
other in the customary course of handling interline traffic. As of
Dec. 31, 1999, most of the amounts receivable or payable related to these
transactions have been satisfied.
NS Rail provides certain general and administrative support
functions to Conrail, the fees for which are billed in accordance with
several service-provider arrangements.
"Conrail rents and services," a new line on the income statements
beginning June 1, 1999, includes expenses for amounts due to PRR and CRC
for use by NS Rail of operating properties and equipment, operation of
the Shared Assets Areas and continued operation of certain facilities
during a transition period.
"Due from Conrail" includes $39 million for vacation liability
related to the portion of CRC's work force that became NS Rail employees
on the Closing Date. NS Rail increased its vacation liability
accordingly, and will pay these employees as they take vacation.
"Notes and accounts payable to Conrail" includes $123 million of
interest-bearing loans made to NS Rail by a PRR subsidiary, payable on
demand. The interest rate for these loans is variable and was 5.6% at
Dec. 31, 1999. Also included is $61 million due to PRR and CRC related to
expenses included in "Conrail rents and services," as discussed above.
Noncash Dividends
- -----------------
NSR declared and issued to NS noncash dividends of $1.1 billion in
1999, $1.0 billion in 1998 and $147 million in 1997. The 1999 amount
included a $491 million dividend of accounts receivable declared December
1. The remainder of the 1999 dividends and all of the 1998 and 1997
dividends were settled by reduction of NSR's interest-bearing advances
due from NS.
Noncash dividends are excluded from the Consolidated Statements of
Cash Flows.
Sale of Accounts Receivable
- ---------------------------
Effective Dec. 1, 1999, NS Rail sells its rail accounts receivable
to NS. The sales are accounted for as secured borrowings, and the
liability is included in "Due to NS - net" in the Consolidated Balance
Sheet. As of Dec. 31, 1999, "Accounts receivable" included $388 million
of such sold receivables.
NS Rail services the receivables on behalf of NS for a fee that
approximates the costs of servicing. The fee is reflected in the discount
applied to receivables sold. The discount is included in "Other income -
net" in the Consolidated Statement of Income and is a component of "Other
interest expense" in Note 3.
PAGE 51
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
Intercompany Accounts
- ---------------------
December 31,
------------
1999 1998
---- ----
Average Average
Interest Interest
($ in millions) Balance Rate Balance Rate
--------------- ------- -------- ------- --------
Due from NS:
Advances $ 75 4% $ 354 5%
Due to NS:
Advances (234) 5% --
Notes (324) 7% (311) 7%
------ ------
Due (to) from
NS - net $ (483) $ 43
====== ======
Interest is applied to certain advances at the average NS yield on
short-term investments and to the notes at specified rates. "Interest
income" includes interest on amounts due from NS of $13 million in 1999,
$48 million in 1998 and $15 million in 1997.
"Other interest expense" includes interest on amounts due to NS of
$31 million in 1999, $23 million in 1998 and $17 million in 1997.
Intercompany Federal Income Tax Accounts
- ----------------------------------------
In accordance with the NS Tax Allocation Agreement, intercompany
federal income tax accounts are recorded between companies in the NS
consolidated group. NS Rail had long-term intercompany federal income tax
payables (which are included in "Deferred income taxes" in the
Consolidated Balance Sheets) of $809 million at Dec. 31, 1999, and
$633 million at Dec. 31, 1998.
Capital Contributions
- ---------------------
In 1999, NS Rail recognized capital contributions for a transfer of
pension assets NS received from the Conrail pension plan and for benefits
NS Rail received related to tax credits generated by a nonrail subsidiary
of NS.
In 1998, NS Rail recognized a capital contribution for benefits it
received related to tax credits generated by a nonrail subsidiary of NS.
Cash Required for NS Debt
- -------------------------
To finance the cost of the Conrail transaction, NS issued and sold
commercial paper and $4.3 billion of unsecured notes. A significant
portion of the funding for the interest and repayments on this and other
NS debt is expected to be provided by NS Rail.
NS is subject to various financial covenants with respect to its
debt and under its credit agreement, including a minimum net worth
requirement, a maximum leverage ratio restriction and certain
restrictions on issuance of further debt. As a major NS subsidiary,
NS Rail is subject to certain of those covenants.
PAGE 52
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
3. OTHER INCOME - NET
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Gains from sales of properties
and investments $ 44 $ 31 $ 9
Rental income 32 24 22
Interest income (Note 2) 20 58 31
Dividends from NS 17 17 17
Other interest expense (Note 2) (58) (45) (45)
Corporate-owned life insurance
- net (3) 11 7
Taxes on nonoperating property (3) (2) (2)
Other - net (7) (4) (11)
------- ------- -------
Total $ 42 $ 90 $ 28
======= ======= =======
4. INCOME TAXES
Provision for Income Taxes
- --------------------------
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Current:
Federal $ 159 $ 269 $ 279
State 10 14 31
------- ------- -------
Total current taxes 169 283 310
------- ------- -------
Deferred:
Federal 8 87 75
State (3) 13 (5)
------- ------- -------
Total deferred taxes 5 100 70
------- ------- -------
Provision for income
taxes $ 174 $ 383 $ 380
======= ======= =======
Reconciliation of Statutory Rate to Effective Rate
- --------------------------------------------------
Total income taxes as reflected in the Consolidated Statements of
Income differ from the amounts computed by applying the statutory federal
corporate tax rate as follows:
1999 1998 1997
($ in millions) Amount % Amount % Amount %
--------------- ------ --- ------ --- ------ ---
Federal income tax
at statutory rate $ 177 35 $ 388 35 $ 397 35
State income taxes,
net of federal tax
benefit 4 1 18 2 17 2
Corporate-owned life
insurance -- -- (12) (1) (10) (1)
Other - net (7) (2) (11) (1) (24) (2)
----- --- ----- --- ----- ---
Provision for
income taxes $ 174 34 $ 383 35 $ 380 34
===== === ===== === ===== ===
PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
Inclusion in Consolidated Return
- --------------------------------
NS Rail is included in the consolidated federal income tax return of
NS. The provision for current income taxes in the Consolidated Statements
of Income reflects NS Rail's portion of NS' consolidated tax provision.
Tax expense or tax benefit is recorded on a separate company basis.
Deferred Tax Assets and Liabilities
- -----------------------------------
Certain items are reported in different periods for financial
reporting and income tax purposes. Deferred tax assets and liabilities
were recorded in recognition of these differences.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
December 31,
------------
($ in millions) 1999 1998
--------------- ---- ----
Deferred tax assets:
Reserves, including casualty
and other claims $ 168 $ 158
Employee benefits 95 124
Retiree health and death benefit
obligation 125 126
Taxes, including state and
property 160 157
Other 2 --
-------- --------
Deferred tax assets 550 565
-------- --------
Deferred tax liabilities:
Property (3,029) (2,975)
Unrealized holding gains (153) (237)
Other (31) (30)
-------- --------
Deferred tax liabilities (3,213) (3,242)
Intercompany federal tax payable
- net (809) (633)
-------- --------
Net deferred tax liability (3,472) (3,310)
Net current deferred
tax assets 124 110
-------- --------
Net long-term deferred tax
liability $ (3,596) $ (3,420)
======== ========
Except for amounts for which a valuation allowance has been
provided, Management believes the other deferred tax assets will be
realized.
Internal Revenue Service (IRS) Reviews
- --------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 1994. The consolidated federal income tax returns for 1995 and
1996 are being audited by the IRS. Management believes that adequate
provision has been made for any additional taxes and interest thereon
that might arise as a result of IRS examinations.
PAGE 54
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
5. INVESTMENTS
December 31,
------------
($ in millions) 1999 1998
--------------- ---- ----
Marketable equity securities at
fair value (Note 14) $ 445 $ 687
Corporate-owned life insurance at
net cash surrender value 150 282
Other 29 21
----- -----
Total $ 624 $ 990
===== =====
6. PROPERTIES
December 31, Depreciation
($ in millions) 1999 1998 Rate for 1999
--------------- ---- ---- -------------
Railway property:
Road $ 9,620 $ 9,228 2.8%
Equipment 5,395 5,117 4.1%
Other property 83 77 2.5%
------- -------
15,098 14,422
Less: Accumulated depreciation 4,708 4,437
------- -------
Net properties $10,390 $ 9,985
======= =======
Equipment includes $593 million at Dec. 31, 1999 and 1998 of assets
recorded pursuant to capital leases.
Capitalized Interest
- --------------------
Total interest cost incurred on debt in 1999, 1998 and 1997 was
$54 million, $46 million and $47 million, respectively, of which
$15 million, $21 million and $17 million was capitalized.
PAGE 55
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
7. CURRENT LIABILITIES
December 31,
------------
($ in millions) 1999 1998
--------------- ---- ----
Accounts payable:
Accounts and wages payable $ 324 $ 260
Casualty and other claims 180 143
Equipment rents payable - net 135 72
Vacation liability 123 80
Other 25 22
------- -------
Total $ 787 $ 577
======= =======
Other current liabilities:
Accrued Conrail-related costs
(Note 2) $ 42 $ --
Interest payable 38 13
Liabilities for forwarded
traffic 37 27
Retiree health and death
benefit obligation (Note 13) 24 24
Other 11 9
------- -------
Total $ 152 $ 73
======= =======
8. DEBT
Long-Term Debt
- --------------
December 31,
------------
($ in millions) 1999 1998
--------------- ---- ----
Equipment obligations at an
average rate of 6.8%
maturing to 2014 $ 450 $ 377
Capitalized leases at an average
rate of 6.3% maturing to 2015 382 349
Other debt at an average rate
of 5.4% maturing to 2015 34 34
------- -------
Total long-term debt 866 760
------- -------
Current maturities (85) (141)
------- -------
Long-term debt
less current maturities $ 781 $ 619
======= =======
PAGE 56
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
8. DEBT (continued)
Long-term debt matures as follows:
2001 $ 80
2002 75
2003 78
2004 76
2005 and subsequent years 472
------
Total $ 781
======
The equipment obligations and the capitalized leases are secured by
liens on the underlying equipment.
Capital Lease Obligations
- -------------------------
During 1998 and 1997, NSR entered into capital leases covering new
locomotives. The related capital lease obligations, totaling $127 million
in 1998 and $64 million in 1997, were reflected in the Consolidated
Balance Sheets as debt and, because they were noncash transactions, were
excluded from the Consolidated Statements of Cash Flows.
These and certain other lease obligations carry an average stated
interest rate of 7.1%, but were effectively converted to variable rate
obligations using interest rate swap agreements. The interest rates on
the swap obligations are based on the six-month London Interbank Offered
Rate and are reset every six months with changes in interest rates
accounted for as an adjustment of interest expense over the terms of the
leases. As of Dec. 31, 1999, the notional amount of the swap agreements
was $281 million, and the average interest rate was 6.3%. As a result,
NS Rail is exposed to the market risk associated with fluctuations in
interest rates. To date, the effects of the rate fluctuations have been
favorable and not material. Counterparties to the interest rate swap
agreements are major financial institutions believed by Management to be
creditworthy.
9. LEASE COMMITMENTS
NS Rail is committed under long-term lease agreements, which expire
on various dates through 2067, for equipment, lines of road and other
property. The following amounts do not include payments to PRR under the
Operating Agreement and lease agreements or to CRC under the SAA
agreements (see Note 2). Future minimum lease payments other than to PRR
and CRC are as follows:
PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
9. LEASE COMMITMENTS (continued)
Operating Capital
($ in millions) Leases Leases
--------------- --------- -------
2000 $ 96 $ 47
2001 74 47
2002 62 47
2003 58 46
2004 50 46
2005 and subsequent
years 553 245
------ ------
Total $ 893 478
======
Less imputed interest
on capital leases at
an average rate of
7.1% 96
------
Present value of
minimum lease payments
included in debt $ 382
======
Operating Lease Expense
- -----------------------
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Minimum rents $ 117 $ 75 $ 68
Contingent rents 61 40 43
------ ------ ------
Total $ 178 $ 115 $ 111
====== ====== ======
10. OTHER LIABILITIES
December 31,
------------
($ in millions) 1999 1998
--------------- ---- ----
Casualty and other claims $ 275 $ 271
Retiree health and death
benefit obligation (Note 13) 256 264
Accrued Conrail-related
costs (Note 2) 102 --
Net pension obligation
(Note 13) 74 72
Other 337 302
------- -------
Total $ 1,044 $ 909
======= =======
PAGE 58
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
11. STOCK
Preferred
- ---------
There are 10,000,000 shares of no par value serial preferred stock
authorized. This stock may be issued in series from time to time at the
discretion of the Board of Directors with any series having such voting
and other powers, designations, dividends and other preferences as deemed
appropriate at the time of issuance. On Dec. 31, 1999 and 1998, 1,197,027
shares of $2.60 Cumulative Preferred Stock, Series A (Series A Stock)
were issued, and 1,096,907 shares were held other than by subsidiaries,
including 176,705 shares held by NS. The Series A Stock has a $50 per
share stated value. The Series A Stock is callable at any time at $50 per
share plus accrued dividends and has one vote per share on all matters,
voting as a single class with holders of other stock.
Preference
- ----------
There are 10,000,000 shares of no par value serial preference stock
authorized. None of these shares has been issued.
Common
- ------
There are 50,000,000 shares of no par value common stock with a
stated value of $10 per share authorized. NS owned all 16,668,997 shares
issued and outstanding at Dec. 31, 1999 and 1998.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
"Accumulated other comprehensive income" reported in "Stockholders'
equity" included unrealized gains, net of taxes, on securities of
$272 million at Dec. 31, 1999, and $428 million at Dec. 31, 1998, (see
Note 14) and minimum pension liability of $13 million at Dec. 31, 1999,
and $14 million at Dec. 31, 1998. "Other comprehensive income" reported
in the Consolidated Statements of Changes in Stockholders' Equity
consisted of the following:
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Unrealized gains on securities $ (242) $ 22 $ 25
Minimum pension liability 2 (23) --
Income taxes 85 1 (9)
------ ------ ------
Other comprehensive income $ (155) $ -- $ 16
====== ====== ======
"Unrealized gains on securities" included reclassification
adjustments for gains realized in income from the sale of the securities
of less than $1 million in 1999, $2 million in 1998 and less than
$1 million in 1997.
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
NS Rail provides defined pension benefits, principally for salaried
employees, through participation in NS' funded and defined benefit
pension plans. NS Rail also provides specified health care and death
benefits to eligible retired employees and their dependents by
participating in welfare benefit plans sponsored by NS. Under the present
plans, which may be amended or terminated at NS' option, a defined
PAGE 59
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
percentage of health care expenses is covered, reduced by any deductibles,
co-payments, Medicare payments and, in some cases, coverage provided under
other group insurance policies. The following data relate to the combined
NS plans:
Pension Benefits Other Benefits
($ in millions) 1999 1998 1999 1998
--------------- ---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at
beginning of year $ 1,063 $ 956 $ 362 $ 360
Increase related to former
Conrail employees 68 -- -- --
Service cost 17 13 11 10
Interest cost 73 67 23 24
Amendment -- 40 -- --
Actuarial (gains) losses (92) 61 (33) (9)
Benefits paid (71) (74) (23) (23)
------- ------- ------- -------
Benefit obligation at
end of year 1,058 1,063 340 362
------- ------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 1,544 1,360 139 111
Transfer of assets from
Conrail plan 352 -- -- --
Actual return on plan assets 250 253 21 28
Employer contribution 4 5 15 23
401(h) account transfer (7) -- -- --
Benefits paid (71) (74) (23) (23)
------- ------- ------- -------
Fair value of plan
assets at end of year 2,072 1,544 152 139
------- ------- ------- -------
Funded status 1,014 481 (188) (223)
Unrecognized initial net asset (10) (16) -- --
Unrecognized (gain) loss (799) (517) (97) (57)
Unrecognized prior service
cost (benefit) 40 44 -- (12)
------- ------- ------- -------
Net amount recognized $ 245 $ (8) $ (285) $ (292)
======= ======= ======= =======
Amounts recognized in the
Consolidated Balance Sheets
consist of:
Prepaid benefit cost $ 298 $ 41 $ -- $ --
Accrued benefit liability (74) (72) (285) (292)
Accumulated other
comprehensive income 21 23 -- --
------- ------- ------- -------
Net amount recognized $ 245 $ (8) $ (285) $ (292)
======= ======= ======= =======
PAGE 60
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
Of the pension plans included above, the nonqualified pension plans
were the only plans with an accumulated benefit obligation in excess of
plan assets. These plans' accumulated benefit obligations were
$74 million at Dec. 31, 1999, and $72 million at Dec. 31, 1998. These
plans' projected benefit obligations were $76 million at Dec. 31, 1999,
and $77 million at Dec. 31, 1998. Because of the nature of such plans,
there are no plan assets.
During 1999, a Section 401(h) account transfer of $7 million was
made, transferring a portion of pension assets to fund 1999 medical
payments for retirees.
As a result of the commencement of operations over Conrail's lines
(see Note 2), NS hired a substantial portion of Conrail's former work
force. In August 1999, NS assumed certain pension obligations related to
those employees. These obligations, along with pension plan assets in
excess of the obligations, were transferred to the NS plans in 1999.
NS has amended its qualified pension plan to conform certain
provisions of its plan with the Conrail plan and to provide prior service
credit to Conrail employees for benefits under the NS plan. The
amendment, as it relates to NS employees, increased the pension benefit
obligation at Dec. 31, 1998, by $40 million.
In January 2000, NS announced a voluntary early retirement program
that included enhancements to pension benefits for eligible nonunion
employees. Approximately 1,180 employees, or 20% of NS' nonunion work
force, were eligible for the program. Benefits will be paid out of NS'
over-funded pension plan.
Pension and other postretirement benefit costs are determined based
on actuarial valuations that reflect appropriate assumptions as of the
measurement date, ordinarily the beginning of each year. The funded
status of the plans is determined using appropriate assumptions as of
each year end. During 1999, NS received assets from the Conrail pension
plan and assumed certain related liabilities. As a result, the
measurement dates for determining pension costs were Jan. 1, 1999, and
Aug. 31, 1999, and reflect discount rates of 6.75% and 7.75%,
respectively, and other assumptions appropriate at those dates. A summary
of the major assumptions follows:
1999 1998 1997
---- ---- ----
Funded status:
Discount rate 7.75% 6.75% 7.25%
Future salary increases 5% 5% 5.25%
Pension cost:
Discount rate 6.75% 7.25% 7.75%
Return on assets in plans 10% 9% 9%
Future salary increases 5% 5.25% 5.25%
PAGE 61
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
Pension and Other Postretirement Benefit Costs
- ----------------------------------------------
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
PENSION BENEFITS
Service cost $ 17 $ 13 $ 11
Interest cost 73 67 66
Expected return on plan
assets (152) (106) (90)
Amortization of prior service
cost 4 1 1
Amortization of initial net
asset (7) (7) (6)
Recognized net actuarial
(gain) loss (22) (12) (7)
------ ------ ------
Net cost (benefit) $ (87) $ (44) $ (25)
====== ====== ======
OTHER POSTRETIREMENT BENEFITS
Service cost $ 11 $ 10 $ 9
Interest cost 23 24 25
Expected return on plan
assets (12) (9) (7)
Amortization of prior service
cost (12) (12) (12)
Recognized net actuarial
(gain) loss (2) (2) --
------ ------ ------
Net cost $ 8 $ 11 $ 15
====== ====== ======
For measurement purposes, increases in the per capita cost of
covered health care benefits were assumed to be 7.5% for 2000 and 8.0%
for 1999. The rate was assumed to decrease gradually to an ultimate rate
of 5.0% for 2003 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on
the amounts reported in the financial statements. To illustrate, a one-
percentage-point change in assumed health care cost trend would have the
following effects:
One percentage point
($ in millions) Increase Decrease
--------------- -------- --------
Increase (decrease) in:
Total service and interest cost
components $ 4 $ (3)
Postretirement benefit obligation $ 28 $ (24)
Under collective bargaining agreements, NS Rail participates in a
multi-employer benefit plan, which provides certain postretirement health
care and life insurance benefits to eligible agreement employees.
Premiums under this plan are expensed as incurred and amounted to
$5 million in 1999, $5 million in 1998 and $4 million in 1997.
401(k) Plans
- ------------
NS Rail provides 401(k) savings plans for employees. Under the
plans, NS Rail matches a portion of employee contributions, subject to
applicable limitations. In 1999, NS issued shares of its Common Stock to
fund NS Rail's contributions. NS Rail's expenses under these plans were
$12 million in 1999, $10 million in 1998 and $9 million in 1997.
PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
In November 1999, NS issued and contributed to eligible
participants' accounts approximately 2 million shares of its Common Stock
in connection with a temporary special work incentive program available
to NS Rail's unionized employees during much of the third quarter. The
cost of the program, which was charged to compensation and benefits
expenses, was $49 million.
Contributions funded with NS Common Stock were excluded from the
Consolidated Statements of Cash Flows because they were noncash
transactions.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of "Cash and cash equivalents," "Accounts
receivable," "Short-term debt," and "Accounts payable" approximate
carrying values because of the short maturity of these financial
instruments. The fair value of corporate-owned life insurance
approximates carrying value. The carrying amounts and estimated fair
values for the remaining financial instruments, excluding investments
accounted for under the equity method in accordance with APB No. 18,
consisted of the following at December 31:
1999 1998
---- ----
Carrying Fair Carrying Fair
($ in millions) Amount Value Amount Value
--------------- -------- ----- -------- -----
Investments $ 502 $ 507 $ 777 $ 782
Long-term debt 866 867 760 779
Interest rate swaps -- 4 -- 20
Quoted market prices were used to determine the fair value of
marketable securities; underlying net assets were used to estimate the
fair value of other investments. The fair values of debt were estimated
based on quoted market prices or discounted cash flows using current
interest rates for debt with similar terms, company rating and remaining
maturity. The fair value of interest rate swaps were estimated based on
discounted cash flows, reflecting the difference between estimated future
variable-rate payments and future fixed-rate receipts.
Carrying amounts of marketable securities, which consist almost
entirely of shares of NS Common Stock, reflect unrealized holding gains
of $424 million on Dec. 31, 1999, and $666 million on Dec. 31, 1998.
Sales of "available-for-sale" securities were immaterial for years ended
Dec. 31, 1999 and 1998.
15. COMMITMENTS AND CONTINGENCIES
Lawsuits
- --------
NSR and certain subsidiaries are defendants in numerous lawsuits
relating principally to railroad operations. While the final outcome of
these lawsuits cannot be predicted with certainty, it is the opinion of
Management, based on known facts and circumstances, that the amount of NS
Rail's ultimate liability is unlikely to have a material adverse effect
on NS Rail's financial position, results of operations or liquidity.
Environmental Matters
- ---------------------
NS Rail is subject to various jurisdictions' environmental laws and
regulations. It is NS Rail's policy to record a liability where such
liability or loss is probable and its amount can be estimated reasonably.
Claims, if any, against third parties for recovery of cleanup costs
incurred by NS Rail are reflected as receivables in the balance sheet
PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
15. COMMITMENTS AND CONTINGENCIES (continued)
and are not netted against the associated NS Rail liability. Environmental
engineers regularly participate in ongoing evaluations of all identified
sites and in determining any necessary adjustments to initial liability
estimates. NS Rail also has established an Environmental Policy Council,
composed of senior managers, to oversee and interpret its environmental
policy.
As of Dec. 31, 1999, NS Rail's balance sheet included a reserve for
environmental exposures in the amount of $41 million (of which $8 million
is accounted for as a current liability), which is NS Rail's estimate of
the probable cleanup and remediation costs based on available information
at 126 identified locations. On that date, 12 sites accounted for $20
million of the reserve, and no individual site was considered to be
material. NS Rail anticipates that much of this liability will be paid
out over five years; however, some costs will be paid out over a longer
period.
At some of the 126 locations, certain NS Rail subsidiaries, usually
in conjunction with a number of other parties, have been identified as
potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, or comparable state
statutes, which often impose joint and several liability for cleanup
costs.
With respect to known environmental sites (whether identified by NS
Rail or by the EPA or comparable state authorities), estimates of NS
Rail's ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available cleanup techniques, the
likely development of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it) and evolving statutory and regulatory
standards governing liability.
The risk of incurring environmental liability -- for acts and
omissions, past, present and future -- is inherent in the railroad
business. Some of the commodities in NS Rail's traffic mix, particularly
those classified as hazardous materials, can pose special risks that NS
Rail and its subsidiaries work diligently to minimize. In addition,
several NS Rail subsidiaries own, or have owned, land used as operating
property, or which is leased or may have been leased and operated by
others, or held for sale. Because environmental problems may exist on
these properties that are latent or undisclosed, there can be no
assurance that NS Rail will not incur environmentally related liabilities
or costs with respect to one or more of them, the amount and materiality
of which cannot be estimated reliably at this time. Moreover, lawsuits
and claims involving these and other now-unidentified environmental sites
and matters are likely to arise from time to time. The resulting
liabilities could have a significant effect on financial condition,
results of operations or liquidity in a particular year or quarter.
However, based on its assessments of the facts and circumstances now
known, Management believes that it has recorded the probable costs for
dealing with those environmental matters of which the Corporation is
aware. Further, Management believes that it is unlikely that any
identified matters, either individually or in the aggregate, will have a
material adverse effect on NS Rail's financial position, results of
operations or liquidity.
Tax Benefit Leases
- ------------------
In January 1995, the United States Tax Court issued a preliminary
decision that disallowed some of the tax benefits a predecessor of NSR
purchased from a third party pursuant to a safe harbor lease agreement in
1981. The Tax Court finalized this decision in February 1997, and all
avenues of appeal have been exhausted. NS Rail has requested payment and
filed suit to collect from the third party in accordance with
indemnification provisions of the lease agreement, and Management
believes that this receivable will be collected.
PAGE 64
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
15. COMMITMENTS AND CONTINGENCIES (continued)
Change-in-Control Arrangements
- ------------------------------
NS has compensation agreements with officers and certain key
employees that become operative only upon a change in control -- as
defined in those agreements -- of that corporation. The agreements
provide generally for payments based on compensation at the time of a
covered individual's involuntary or other specified termination and for
certain other benefits.
Debt Guarantees
- ---------------
As of Dec. 31, 1999, NSR and certain of its subsidiaries are
contingently liable as guarantors with respect to $104 million of
indebtedness of related entities.
PAGE 65
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Norfolk Southern Railway Company:
We have audited the consolidated financial statements of Norfolk
Southern Railway Company and subsidiaries as listed in the index in
Item 8. In connection with our audits of the consolidated financial
statements, we also have audited the consolidated financial statement
schedule listed in Item 14(a)2. These consolidated financial
statements and this consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and this
consolidated financial statement schedule 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Norfolk Southern Railway Company and subsidiaries as of December
31, 1999 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1999, in conformity with generally accepted accounting principles.
Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Norfolk, Virginia
January 25, 2000
PAGE 66
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
PAGE 67
PART III
--------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
Item 11. Executive Compensation.
- ------- ----------------------
Item 12. Security Ownership of Certain Beneficial Owners and
- ------- ---------------------------------------------------
Management.
----------
and
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
In accordance with General Instruction G(3), the information
called for by Part III is incorporated herein by reference from
Norfolk Southern Railway's definitive Proxy Statement, to be dated
April 14, 2000, for the Norfolk Southern Railway Annual Meeting of
Stockholders to be held on May 11, 2000, which definitive Proxy
Statement will be filed electronically with the Commission pursuant to
Regulation 14A. The information regarding executive officers called
for by Item 401 of Regulation S-K is included in Part I hereof
beginning on Page 17 under "Executive Officers of the Registrant."
PAGE 68
PART IV
-------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K.
-------------------
(A) The following documents are filed as part of this report:
1. Index to Consolidated Financial Statements: Page
------------------------------------------ ----
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997 41
Consolidated Balance Sheets
As of December 31, 1999 and 1998 42
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 44
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 46
Notes to Consolidated Financial Statements 47
Independent Auditors' Report 65
2. Financial Statement Schedule:
The following consolidated financial statement schedule
should be read in connection with the consolidated financial
statements:
Index to Consolidated Financial Statement Schedule Page
-------------------------------------------------- ----
Schedule II - Valuation and Qualifying Accounts 75
Schedules other than the one listed above are omitted either
because they are not required or are inapplicable, or
because the information is included in the consolidated
financial statements or related notes.
PAGE 69
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits
Exhibit
Number Description
- ------- --------------------------------------------------------
3 Articles of Incorporation and Bylaws -
3(i) The amended Restated Articles of Incorporation of
Norfolk Southern Railway Company are incorporated
herein by reference from Exhibit 3(a) of Norfolk
Southern Railway's 1990 Annual Report on Form 10-K.
3(ii) The Bylaws of Norfolk Southern Railway Company, as last
amended March 3, 1993, are incorporated herein by
reference from Exhibit 3(b) of Norfolk Southern
Railway's 1992 Annual Report on Form 10-K.
4 Instruments Defining the Rights of Security Holders,
Including Indentures -
In accordance with Item 601(b)(4)(iii) of
Regulation S-K, copies of instruments of Norfolk
Southern Railway and its subsidiaries with respect to
the rights of holders of long-term debt are not filed
herewith, or incorporated by reference, but will be
furnished to the Commission upon request.
10 Material Contracts -
(a) The Transaction Agreement, dated as of June 10, 1997,
by and among CSX, CSX Transportation, Inc., NS,
Registrant, Conrail Inc., Consolidated Rail Corporation
and CRR Holdings LLC, with certain schedules thereto,
is incorporated herein by reference from Exhibit 10 to
Norfolk Southern Railway Company's Form 8-K filed
electronically on June 30, 1997.
(b) Amendment No. 1, dated as of August 22, 1998, to the
Transaction Agreement, dated as of June 10, 1997, by
and among CSX Corporation, CSX Transportation, Inc.,
Norfolk Southern Corporation, Norfolk Southern Railway
Company, Conrail Inc., Consolidated Rail Corporation
and CRR Holdings LLC is incorporated herein by
reference from Exhibit 10.1 to Norfolk Southern
Railway Company's Form 10-Q Report for the period ended
June 30, 1999.
PAGE 70
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
- ------- --------------------------------------------------------
10 Material Contracts (continued) -
(c) Amendment No. 2, dated as of June 1, 1999, to the
Transaction Agreement, dated June 10, 1997, by and
among CSX Corporation, CSX Transportation, Inc.,
Norfolk Southern Corporation, Norfolk Southern Railway
Company, Conrail Inc., Consolidated Rail Corporation
and CRR Holdings LLC is incorporated herein by
reference from Exhibit 10.2 to Norfolk Southern
Railway Company's Form 10-Q Report for the period ended
June 30, 1999.
(d) Operating Agreement, dated as of June 1, 1999, by and
between Pennsylvania Lines LLC and Norfolk Southern
Railway Company is incorporated herein by reference
from Exhibit 10.3 to Norfolk Southern Railway Company's
Form 10-Q Report for the period ended June 30, 1999.
(e) Shared Assets Area Operating Agreement for North
Jersey, dated as of June 1, 1999, by and among
Consolidated Rail Corporation, CSX Transportation, Inc.
and Norfolk Southern Railway Company, with exhibit
thereto, is incorporated herein by reference from
Exhibit 10.4 to Norfolk Southern Railway Company's
Form 10-Q Report for the period ended June 30, 1999.
(f) Shared Assets Area Operating Agreement for South
Jersey/Philadelphia, dated as of June 1, 1999, by and
among Consolidated Rail Corporation, CSX
Transportation, Inc. and Norfolk Southern Railway
Company, with exhibit thereto, is incorporated herein
by reference from Exhibit 10.5 to Norfolk Southern
Railway Company's Form 10-Q Report for the period ended
June 30, 1999.
(g) Shared Assets Area Operating Agreement for Detroit,
dated as of June 1, 1999, by and among Consolidated
Rail Corporation, CSX Transportation, Inc. and Norfolk
Southern Railway Company, with exhibit thereto, is
incorporated herein by reference from Exhibit 10.6 to
Norfolk Southern Railway Company's Form 10-Q Report for
the period ended June 30, 1999.
PAGE 71
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
- ------- --------------------------------------------------------
10 Material Contracts (continued) -
(h) Monongahela Usage Agreement, dated as of June 1, 1999,
by and among CSX Transportation, Inc., Norfolk Southern
Railway Company, Pennsylvania Lines LLC and New York
Central Lines LLC, with exhibit thereto, is
incorporated herein by reference from Exhibit 10.7 to
Norfolk Southern Railway Company's Form 10-Q Report for
the period ended June 30, 1999.
(i) The Agreement, entered into as of July 27, 1999,
between North Carolina Railroad Company and Norfolk
Southern Railway Company, is filed herewith.
(j) The Supplementary Agreement, entered into as of
January 1, 1987, between the Trustees of the Cincinnati
Southern Railway and The Cincinnati, New Orleans and
Texas Pacific Railway Company (the latter a wholly
owned subsidiary of Norfolk Southern Railway Company) -
extending and amending a Lease, dated as of October 11,
1881 (both the Lease and Supplementary Agreement,
formerly incorporated by reference with Exhibit 10(b)
to Southern's 1987 Annual Report on Form 10-K) - is
incorporated herein by reference from Exhibit 10(a) to
Norfolk Southern Railway's 1994 Annual Report on
Form 10-K.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
(B) Reports on Form 8-K.
No reports on Form 8-K were filed for the three months
ended December 31, 1999.
(C) Exhibits.
The Exhibits required by Item 601 of Regulation S-K as
listed in Item 14(a)3 are filed herewith or
incorporated herein by reference.
PAGE 72
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
Exhibit
Number Description
- ------- --------------------------------------------------------
(D) Financial Statement Schedules.
Financial statement schedules and separate financial
statements specified by this Item are included in
Item 14(a)2 or are otherwise not required or are not
applicable.
PAGE 73
POWER OF ATTORNEY
-----------------
Each person whose signature appears below under "SIGNATURES"
hereby authorizes Henry C. Wolf and J. Gary Lane, or either of them,
to execute in the name of each such person, and to file, any amendment
to this report and hereby appoints Henry C. Wolf and J. Gary Lane, or
either of them, as attorneys-in-fact to sign on his behalf,
individually and in each capacity stated below, and to file, any and
all amendments to this report.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Norfolk Southern Railway Company has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on this 6th day of March, 2000.
NORFOLK SOUTHERN RAILWAY COMPANY
By /s/ David R. Goode
------------------------------------
(David R. Goode, President and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on this 6th day of March,
2000, by the following persons on behalf of Norfolk Southern Railway
Company and in the capacities indicated.
Signature Title
- --------- -----
/s/ David R. Goode
- -------------------------- President and Chief Executive
(David R. Goode) Officer and Director
(Principal Executive Officer)
/s/ John P. Rathbone
- -------------------------- Vice President and Controller
(John P. Rathbone) (Principal Accounting Officer)
/s/ Henry C. Wolf
- -------------------------- Vice President
(Henry C. Wolf) and Chief Financial Officer
and Director
(Principal Financial Officer)
PAGE 74
Signature Title
- --------- -----
/s/ James C. Bishop, Jr.
- -------------------------- Director
(James C. Bishop, Jr.)
/s/ Jon L. Manetta
- -------------------------- Director
(Jon L. Manetta)
/s/ L. I. Prillaman
- -------------------------- Director
(L. I. Prillaman)
/s/ Stephen C. Tobias
- -------------------------- Director
(Stephen C. Tobias)
PAGE 75
Schedule II
Page 1 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1998 and 1999
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 1997
- ----------------------------
Valuation allowance
(included net in deferred
tax liability) for
deferred tax assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other
claims included in
other liabilities $247 $108 $ 2 (1) $105 (2) $252
Current portion of
casualty and other
claims included in
accounts payable $165 $ 14 $170 (1) $178 (3) $171
Year ended December 31, 1998
- ----------------------------
Valuation allowance
(included net in deferred
tax liability) for
deferred tax assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other
claims included in
other liabilities $252 $ 86 $ 22 (1) $ 89 (2) $271
Current portion of
casualty and other
claims included in
accounts payable $171 $ 11 $149 (1) $188 (3) $143
(1) Includes revenue overcharges provided through charges to
operating revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
(continued)
PAGE 76
Schedule II
Page 2 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1998 and 1999 (continued)
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 1999
- ----------------------------
Valuation allowance
(included net in deferred
tax liability) for
deferred tax assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other
claims included in
other liabilities $271 $114 $ 9 (1) $119 (2) $275
Current portion of
casualty and other
claims included in
accounts payable $143 $ 19 $191 (1) $173 (3) $180
(1) Includes revenue overcharges provided through charges to
operating revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
PAGE 77
EXHIBIT INDEX
-------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Electronic
Submission
Exhibit
Number Description Page
- ---------- ---------------------------------------------------- ----
10 (i) The Agreement, entered into as of July 27, 1999,
between North Carolina Railroad Company and
Norfolk Southern Railway Company. 78
21 Subsidiaries of Norfolk Southern Railway. 122
27 Financial Data Schedule. 123
(Required to be electronically submitted for use
by the Securities and Exchange Commission only
and not deemed part of this filing.)